For many small businesses, obtaining a business loan can be quite difficult as many small business owners don’t have the collateral to pledge for a traditional secured loan. Therefore, unsecured business purpose loans are often a better option. While unsecured business loans are often tougher to qualify for and can carry higher interest rates than secured loans, they ultimately hold less risk for borrowers.
Below, you’ll learn more about the benefits of using unsecured business purpose loans, how unsecured business loans work, and the steps you can take to obtain an unsecured business loan today.
Understanding Unsecured Business Loans
Essentially, unsecured business loans work in a similar manner as traditional secured business loans. However, the main difference is that borrowers are not required to offer a form of collateral with an unsecured business loan. But, as with any loan, there are pros and cons to securing this type of funding for your small business financing needs.
Pros of Unsecured Business Loans
- They can be easy to obtain because they typically offer a faster application process compared to secured business loans.
- Unsecured business loans can offer a quick approval time, with some lenders approving unsecured business loan applications in as little as 24 hours.
- There are often fewer restrictions associated with unsecured business loans.
- There’s less fear surrounding property loss as lenders must have a court order to take business or personal property if an unsecured business loan isn’t paid.
- If your business files for bankruptcy, courts often discharge unsecured loans, whereas secured loans are typically not discharged.
Cons of Unsecured Business Loans
- Lenders typically require personal guarantees. This means that the owner of the business signs an agreement in which they agree to personally repay the loan if the business is unable to do so.
- Unsecured business loans are often riskier for lenders since they do not have collateral such as real estate to secure the loan, which typically causes these types of loans to have a higher interest rate.
- With unsecured business loans, the repayment terms are often shorter, and they may require more frequent payments.
- Qualification for an unsecured business loan often has much stricter qualification requirements and can be difficult to obtain, especially if you or your business have a low credit score. If you don’t qualify for an unsecured business loan, you might want to look into other financing such as lines of credit, a merchant cash advance, or other business credit cards..
Now that you know what an unsecured business loan is and its pros and cons, let’s look at how unsecured business loans work.
How Do Unsecured Business Loans Work?
Unsecured business finance options work like traditional types of secured debt financing. However, with unsecured business loans, borrowers are not required to provide lenders with any form of collateral. Overall, instead of looking at the borrower’s collateral, lenders look at the borrower’s creditworthiness. Generally, you must have a minimum credit score of 680 for a bank to consider you for an unsecured business loan. Lenders also look at the loan amount and the business’s cash flow to determine whether the business is a good risk in terms of providing a loan.
Steps to Obtain an Unsecured Business Loan
To obtain an unsecured business loan, you will need to follow certain steps to make sure you are even eligible to apply. The following includes some of the criteria you will need to meet in order to qualify for an unsecured loan from a bank.
- You will need to have multiple years of documentation for your business.
- It is in your favor to have a strong personal credit score.
- You should have an excellent annual revenue as banks examine this element before granting a loan.
Once you have determined if you meet the criteria of the three elements mentioned above, you can then start the process of obtaining an unsecured business loan from the financial institution of your choice. It is also beneficial to create a detailed business plan before seeking an unsecured business loan from a bank or other financial institution.
In your business plan, be sure to include:
- A company description
- What products or services your business sells
- The management structure of your business
- An analysis of the industry your business is in
- A SWOT analysis of your business
- Any other vital information regarding your business
When applying for an unsecured business loan, keep in mind that the most likely place to obtain this type of loan is from an alternative lender rather than a traditional bank. Popular alternative lenders are financial technology firms that use automated technology to determine a small business’s credit history and overall creditworthiness. Frequently, alternative lenders end up charging borrowers more than traditional banks or credit unions. These are all elements to consider when looking to obtain an unsecured business loan from any type of financial institution, including the Small Business Administration’s (SBA) small business loans.
How Blake Mortgage Can Help
Hopefully, through this overview on unsecured business loans, you have been able to see some of the benefits this type of loan can provide to you and your small business operation. If you’re looking to start the process of obtaining an unsecured business loan, then Blake Mortgage is here to help.
The dedicated team at Blake Mortgage works diligently to connect you with a wide variety of financial institutions that are willing to lend money to small business owners seeking loans. Whether you’re worried about qualifying for a loan or simply getting the best rate, we can help.
Are you ready to discover how Blake Mortgage can help you obtain a business loan today? If so, give us a call or make an appointment to learn more.