Disclaimer: Information in the unsecured business loans articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the unsecured business loans articles often covers financial products that Biz2Credit does not currently offer.

There are pros and cons of every financial product, and unsecured business loans are no different.

While a so-called no-collateral business loan carries the typical risks associating with borrowing and repaying debt, there are many reasons why it could be the right way for you to finance your operations.

From their wide availability and lack of collateral requirement to their potentially fast funding and competitive interest rates, here are eight key calling cards of unsecured business loans.

1. There Are Many Types of Unsecured Business Loans to Choose From

An unsecured business loan might seem like a one-size-fits-all option, but it comes in various forms, including:

• Term loans are the installment loans of business financing since you receive a lump sum, then repay it in fixed, monthly installments until your repayment term end
• Lines of credit are meant for fluid, perhaps seasonal borrowing needs, as you can draw some or all of your credit limit as needed. You only pay interest on what you withdraw.
• Invoice financing or factoring involves borrowing a percentage of the amount of your business’s unpaid invoices, then repaying your debt as your invoices are paid.
• Merchant cash advances (MCAs) front you an amount of your anticipated debit and credit card sales, which you repay with interest.

You can also find unsecured business loans in various places, including banks, credit unions, online lenders and loan marketplaces. Because these loans are so ubiquitous, financial institutions are forced to compete for your business, including by sometimes not charging origination fees or lessening eligibility criteria.

2. You Don’t Have to Supply Collateral

The nature of unsecured business finance products are that they’re not secured by physical or liquid assets, such as the company’s cash, real estate, or equipment.

Not having to supply collateral means not having to forfeit it if your loan repayment goes awry.

However, there’s a catch. Since an unsecured business loan doesn’t require you to pledge an asset, if might ask for something else. Lenders’ minimum credit score requirements could be higher for an unsecured loan, for example.

Also, even if you don’t have to hand over collateral, unsecured business loans might ask you to provide a personal guarantee. This means that if your business fails to repay the loan, you agree to repay it using your personal assets.

3. You Might Be Eligible to Borrow More

For a secured business loan, your loan amount is likely tied to the value of your collateral. If your collateral is a $25,000 company car, for instance, you might be eligible to borrow $17,000 to $20,000.

With unsecured company loans, though, your borrowing power is dictated by other factors, including your business’s credit strength and cash-flow, among others. So, if your business has a strong financial track record and positive outlook, you could be eligible to borrow higher loan amounts that help you achieve your goals.

This will rely heavily on the lender’s underwriting standards.

4. Unsecured Business Loans Are Often Funded Faster

The absence of collateral also means you could apply and gain approval for unsecured loans — and receive the funds — faster than you could with secured financing. This is because lenders don’t have to evaluate and appraise your collateral for underwriting your application.

While banks and credit unions may take longer to fund business loans, online lenders often advertise quick funding once your approved. In other cases, you could expect the funding of your loan to take several days, perhaps a week, which still might be shorter than the timelines for most secured business loans.

5. They’re Accessible to A Variety of Businesses

You might think that no-collateral business loans always impose strict eligibility requirements since they don’t ask you to leave your business’s assets vulnerable. However, given that they’re so widely available, some lenders specialize in providing unsecured business financing to owners who have personal credit scores in the poor range (up to 579) or fair range (580 to 670), according to FICO.

In addition, startups could also qualify for unsecured business loans. Though some lenders require your business to have operated for one to two years (or longer), others specialize in financing for businesses that have been around six months or less.

Be advised: Just because unsecured business loans are accessible doesn’t mean they’re always affordable. If you don’t have good-to-excellent personal or business credit (or haven’t been in business longer than a calendar year), expect to be quoted higher interest rates and APRs as a result.

6. You Could Secure Competitive Interest Rates

On the flip side, if you have very good or even excellent credit (scores of 740 to 799 or 800 and above, respectively), you could potentially secure low rates on unsecured business loans, including credit lines and merchant cash advances. Just be aware the MCAs carry among the highest interest charges of your unsecured loan options.

Your loan’s interest rate is the clearest indicator of its cost. The lower your rate, the less interest you’ll repay during your term, saving your business’s bottom line. As a result, it’s always wise to first improve your personal and business credit before borrowing. Doing so will put you in a stronger position to qualify for lower interest rates on lending options.

Related: Best Business Loans for Owners with Good Credit

7. They Can Help You Build Your Credit

Unsecured business loans can help you improve your personal credit score and establish your business’s credit profile, if your business stays current on repaying its debt.

While researching the best business loans for your situation, talk to lenders about their credit reporting practices. Even if you qualify for unsecured business financing based on your personal credit, borrowing (and repaying) the loan can help strengthen your business credit over time.

Tip: Get and monitor your free personal credit reports via AnnualCreditReport.com, and dispute errors (if any exist) with the reporting bureau (Equifax, Experian and TransUnion). You can track your personal credit scores via your bank, credit card issuer, or fee-based third parties.

As for your business credit, check with each bureau (Dun & Bradstreet, Equifax, or Experian). But be aware these bureaus (and third parties) charge fees to track your business credit scores.

8. Unsecured Loans Could Be Discharged in Bankruptcy

There’s one last advantage to not providing collateral for a business loan: If your business goes bust and you elect bankruptcy, it could be easier to discharge unsecured debt. Having collateral loans on your ledger, however, means forfeiting the assets you used to secure the loan.

Yes, this is a potential advantage of borrowing an unsecured business loan as opposed to a secured alternative, but be aware of some fine print:

• Bankruptcy laws vary by state.
• It’s always wise to consult a debt relief attorney.
• Discharging (or cancelling) debt in the courts is never guaranteed.
• Bankruptcy isn’t the “fresh start” or “clean slate” (for your personal or business finances) that some consumers believe it to be.

FAQs About Unsecured Business Loans

How hard is it to get an unsecured business loan?

Eligibility requirements for unsecured business finance options vary by lender. Some accept borrowers with personal credit scores in FICO’s poor or fair ranges. Others insist on good-to-very good credit. These financial institutions also have unique underwriting criteria relating to your business’s time in operation, cash-flow, and current debt, among others.

What are the pros and cons of unsecured business loans?

Unsecured business loans are accessible, widely available, and can help you build or establish business credit. On the downside, not supplying collateral could mean facing higher effective APRs. And you still might be required to make a personal guarantee.

When is it better to get a secured business loan?

If your business has significant collateral and a realistic path to on-time repayment, oping for a collateral loan could lead to lower interest costs.

How do you apply for business loans?

You can seek business loans in person or online at banks, credit unions, online companies and loan marketplaces. Prioritize financial institutions that offer pre-qualification, or the ability to confirm your eligibility and check your rates without submitting to a hard credit check.

How much do unsecured business loans cost?

The cost of a no-collateral business loan depends on the loan amount, interest rate, and lender-imposed fees. Compare loan costs using a free online business loan calculator. And be sure you’re making apples-to-apples comparisons by using APRs (instead of simple rates) since they account for a lender’s interest charges and fees.

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