How to get an unsecured business loan
Key takeaways
Unsecured small business loans can cover expenses like acquiring equipment, property or other large purchases
Unsecured small business loans do not require collateral and can be approved fairly quickly
If you default on an unsecured small business loan, the bank may seize your assets to cover the cost of the loan
Unsecured small business loans give business owners access to capital with no need for collateral. To receive one, you complete an application and provide documentation. Once the application is reviewed and approved, you get your funds.
With unsecured business loans, lenders take a greater risk when borrowing funds, so they must assess a borrower’s creditworthiness and other factors to measure their ability to repay the loan.
1. Make sure an unsecured loan is the best fit
The purpose of your loan can help you decide if a secured or unsecured business loan is the best fit. For example, if you’re purchasing equipment or property, that asset will secure the loan. You’ll likely get a lower interest rate, but if you default on the loan, the lender could seize your asset.
If you plan to use the loan to cover expenses like inventory, rent and utilities, an unsecured loan could be the right choice. Interest tends to be higher than a secured loan, and in place of collateral, a personal guarantee may be required by your lender when applying.
2. Determine how much money you need
Before taking out a loan, you must determine how much money you need. The average business loan is $663,000, but amounts range from $1,000 to more than $5 million.
Once you determine how much money you need to borrow, you can decide if a term loan makes sense. Perhaps instead of receiving the loan funds in one lump sum, you prefer to open a business line of credit and draw money as needed. You’ll still pay fees, but an unsecured business line of credit only requires you to pay interest on the funds you draw.
3. Seek lenders that match your qualifications and needs
Many lenders are transparent about their business loan requirements. If you confirm each lender’s requirements for an unsecured business loan, you can eliminate the ones from your list that don’t match your qualifications and needs.
Since you’re interested in an unsecured business loan, your options include traditional lenders like Bank of America and online lenders like Credibly. Online lenders tend to have lenient requirements, but traditional banks offer the best interest rates. Of course, these rates are reserved for well-qualified applicants.
In general, you’ll find that lenders set higher requirements for applicants who want unsecured loans due to the increased risk these loans pose. Average unsecured business loan rates also tend to be higher than secured business loans to offset that risk.
Bankrate insight
Although unsecured business loans may have higher rates than secured loans, they can still be a good option for some borrowers. The best unsecured loans include those from:
4. Compare lenders and loans
Traditional and online lenders are common places to get a business loan. As mentioned, traditional banks and credit unions have lower interest rates. Borrowers can also receive face-to-face support. Online lenders operate completely online, so face-to-face support is typically unavailable, but they offer a streamlined application process and fast funding — typically fewer than three days.
As you compare lenders, make sure they offer the right type of unsecured business loan for your needs. That may be a term loan with a long repayment period or a revolving line of credit to cover short-term costs.
You also want to pay special attention to interest rates, loan fees and terms offered to ensure the loan isn’t too expensive or difficult to manage. If prequalification is an option, you can provide some basic information to see your potential loan amount, interest rate, term and monthly payment. Shop around and consider all of your options before you apply for an unsecured business loan.
Bankrate insight
You can get a clear picture of the total cost of borrowing by plugging the loan amount, term and interest rate into a business loan calculator.
5. Gather documents and apply
Once you’ve selected a lender, you can apply for a business loan. Typically, borrowers must provide personal and business details, as well as business loan documentation. Confirm with your lender what you’ll need to complete an application.
Requested business loan documentation may include the following:
Business formation information
Balance sheets
Business plan and projections
Legal documents, such as commercial leases and contractor agreements
Financial documents, such as bank account statements, tax statements and accounts receivables
Alternatives to unsecured business loans
While unsecured business loans can provide fast access to funds for your business, there are other options. Alternatives to unsecured business loans may better suit your needs or align more with your risk tolerance.
Secured business loans: These loans require collateral upfront to guarantee you will repay the loan but may come with lower interest rates.
SBA loans: The U.S. Small Business Administration offers several loans and does not require collateral for loans under $25,000.
Secured lines of credit: Lines of credit are a type of revolving credit. You can spend up to a pre-approved amount and only pay interest on the amount you use. Secured lines of credit typically require a cash deposit to secure the credit line.
Invoice financing: This type of credit allows you to borrow against unpaid customer invoices. The financing company will take a percentage of the invoice when it gets paid.
Grants: Some businesses are eligible for grants, which provide access to funds that do not have to be repaid. There are specific requirements that must be met to receive the money.
Crowdfunding: Businesses can seek funds through crowdfunding, asking for money from supporters. Typically, businesses will promise a product or service in return for investors.
Peer-to-peer lending: You may be able to avoid traditional lenders with peer-to-peer lenders, which allows you to use a platform to ask for money from private funders. Your loan may be funded by a single source or multiple people.
Bankrate insight
Business credit cards are also an alternative option to an unsecured business loan. While they often have lower limits than a traditional loan, they can be secured or unsecured and are a form of revolving credit.
The bottom line
Starting or expanding a business requires money. An unsecured business loan can help, but there are pros and cons worth considering. If an unsecured loan fits your needs, consider the loan’s purpose, how much money you need and your qualifications before you select and apply for a loan.
Frequently asked questions
Do banks give unsecured business loans?
Yes, many banks and other financial institutions offer unsecured business loans. However, they are riskier for a lender, so they typically have higher requirements for approval.
Can a small business loan be unsecured?
Yes, a small business loan can be unsecured. These loans do not require the business owner to put up collateral to receive the funds. If you have an established business with a strong credit score and revenue, you could likely get an unsecured business loan.
What are the requirements for an unsecured loan?
Requirements for an unsecured loan may vary, but businesses typically have to provide documentation about the business, including financial statements, balance sheets, tax returns and profit and loss statements. In some cases, information about the business owner’s personal finances or credit may also be necessary.
