Unsecured Business Loans: Your Top 5 Options in 2019

Looking for unsecured business loans? Here's where to find the best.
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Find the Best Unsecured Business Loans

Unsecured business loans are small business loans that don’t require a borrower to offer collateral. With unsecured business loans, borrowers avoid the risk of putting valuable assets on the line for financing, but lenders make up for their increased risk by charging higher interest rates, requiring personal guarantees, or filing liens.

Many small business owners don’t have enough assets to put down as collateral, or are hesitant to take the risk of putting down collateral. This is why banks and alternative lenders offer unsecured business financing. In this guide, we’ll walk through the details on unsecured business loans, the risks and advantages they come with, and the best unsecured business loans on the market.

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What Are Unsecured Business Loans?

The idea of collateral-based loans is centuries old, but collateral became a central tenet of business lending after the surge of business failures in the 1980s and early ’90s. Since then, offering collateral has become the most popular way of securing a business loan.

To put it simply, collateral is a specific asset or set of assets that you offer as security in exchange for a small business loan. Typically, the lender will then extend you a loan that equals the value of the collateral. If the business owner fails to make timely payments on the loan, lenders can obtain a court order to seize the collateral from the borrower and liquidate it for repayment of the loan.

If your business has assets—like computers or manufacturing equipment, real estate, vehicles, or valuable inventory—you might be able to use those assets as collateral for the loan. Financial instruments, such as a bank account, can also serve as collateral. But if your business does not own such valuable assets, lenders might expect you to collateralize your loan through personal assets, like your family home or car.

 


Top 5 Unsecured Business Loan Lenders

Several lenders offer unsecured business loans, but it’s important to proceed with caution. These loans are unsecured in the sense that specific collateral isn’t required to qualify. However, as we’ll explain more shortly, lenders have other ways to lower their own risks that come with providing unsecured financing. 

Keeping this in mind, here are the top five options for unsecured business loans:

1. Kabbage

Kabbage offers a business line of credit that can range from $2,000 all the way up to $250,000. There’s no need to provide specific collateral in order to qualify for Kabbage financing.

The best part of a Kabbage line of credit is not only that they meet the “unsecured business loans” requirement, but they also provide fast access to capital. If you need funding quickly, Kabbage is a great option because they can fund your application within a matter of hours. 

Plus, they don’t set a minimum qualifying credit score, so this is a particularly good unsecured business financing option for borrowers with bad credit. You only need to have been in business for one year and generating at least $50,000 in annual revenue.

Get more details from our Kabbage review.

See If You Qualify

2. OnDeck Capital

OnDeck Capital also offers short-term unsecured business loans and unsecured lines of credit. Just like Kabbage, OnDeck financing doesn’t depend on the value of specific business assets. They offer financing from $5,000 to $500,000.

It is slightly harder to qualify for an OnDeck loan compared to Kabbage, but you’ll get better interest rates than you’d typically be able to access through unsecured business loans—OnDeck’s interest rates range from 13.99% to 36% on their line of credit product. This is lower than Kabbage’s starting point for interest rates.

OnDeck’s unsecured product works particularly well if you need working capital. You can use OnDeck’s product to handle cash flow issues or cover unexpected expenses that come up.

Get more details from our OnDeck Capital review.

See If You Qualify

3. StreetShares

StreetShares is yet another alternative business lender that offers unsecured business loans. Loans go up to $250,000 and come as a short-term loan or line of credit. This lender originally launched to help veteran-owned businesses, but loans are available to non-veterans as well in a range of industries.

In order to qualify for StreetShares financing, you need to have a 640 credit score and be in business for at least one year. However, only $25,000 in annual revenue is required, and interest rates start at just 7%. This makes StreetShares an economical option for home-based businesses, microbusinesses, and slower-growth businesses that are seeking unsecured business loans.

Get more details from our StreetShares review.

4. LendingClub

LendingClub offers medium-term business loans that are closer to the business loans you’ll find at a bank. LendingClub was recently acquired by Opportunity Fund, but the loan product is similar. Through Opportunity Fund, you can get a loan between $2,600 and $250,000.

These loans have a fast turnaround, but come with lower interest rates and longer terms than OnDeck and Kabbage. Interest rates at Opportunity Fund start at just 7.9%, which is competitive with a bank. If you’re looking for unsecured business loans, and have a strong credit profile, then Opportunity Fund will be a solid, unsecured alternative to business loans from a bank.

Get more details from our LendingClub review.

See If You Qualify

5. Prosper

Prosper provides unsecured personal loans that you can use to start a new business or capitalize an existing business. In order to qualify for the options we’ve covered so far, your business must already be operating. Prosper is an opportunity for startup owners who want unsecured business loans.

Similar to the other unsecured loan options, it’s very quick and easy to apply for a Prosper loan. Loans go up to $40,000, and during the application process, you’ll be asked to specify that you’re planning to use the Prosper loan for business purposes. You won’t have to provide any collateral or business assets to qualify for the Prosper loan. You pay off the loan in a three or five year term with fixed, monthly payments. Interest rates start at around 7% and go up from there based on creditworthiness.


Unsecured Business Loans: Word of Caution

Lenders who offer unsecured business loans face greater risk than secured lenders. Since there’s no specific asset to back the loan, the lender lacks an easy solution if you default on the loan. For this reason, lenders of unsecured business loans have alternative means of protecting their investments.

Personal Guarantee

personal guarantee is an agreement with your lender that puts your personal assets on the line. If your business fails, the lender will first look to your business assets to recover the outstanding balance. However, you’re also personally responsible for repaying the loan. If your business assets are insufficient, creditors can claim your personal assets (like your home, investment accounts, and so on) as repayment. Unlike specific collateral, a personal guarantee leverages any and all financial assets that you have now, and even assets you might obtain in the future.

It’s very difficult to find a business loan with no personal guarantee. It’s more about what kind of personal guarantee you sign—unlimited or limited. When you sign an unlimited personal guarantee, you’re agreeing to let the lender recover 100% of the loan amount in question, plus any legal fees associated with seizing your assets. The creditor can go after any or all personal assets you have: your life savings, your retirement, your kid’s college fund, your house, your car—even your spouse’s personal assets could be up for grabs. Whatever it takes to cover the full cost of the loan, plus interest and legal fees, will be theirs to seize as repayment for the loan.

As the name suggests, limited personal guarantees set specific parameters on what can be collected from you in the event that you default on your loan—usually in the form of a set dollar amount. Limited guarantees are most often used when multiple business partners take out a loan for the company together. These guarantees help define each person’s piece of the debt pie if the company defaults on a business loan.

 

Blanket Business Lien

Just like a personal guarantee potentially puts all your personal assets on the line, a blanket business lien does the same for your business’s assets.

A business lien is a legal claim included in the fine print of almost all small business loans—including unsecured loans—to help protect lenders in case a borrower defaults. When lenders file liens for unpaid debts, they can sell a business’s assets in order to collect the money owed to them. There’s no specific piece of collateral that’s at issue, but the business can go after whatever your business owns to recover the principal and interest on your loan.


Unsecured Business Loans: The Pros and Cons

Unsecured Business Loan Advantages

To be sure, unsecured business loans are highly sought after for a reason. Here are some undeniable advantages to choosing an unsecured business loan as your funding solution:

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Easy and Fast Funding

Applications on unsecured business loans typically aren’t as lengthy and involved as other types of business loans.

Some of the lenders offering unsecured business loans only need a few pieces of information to get the funds in your account.

This makes unsecured business financing a good option for borrowers who can’t wait for loan that requires a longer application and vetting process—like SBA loans or medium-term loans.

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No Risk to Your Assets

One of the most obvious and noteworthy benefits of funding your business with an unsecured loan is that these loans don’t risk your personal or business assets.

With secured business loans, you’re securing the loan with a valuable piece of collateral—your home, your business property, a savings account, and so on. But if you default on an unsecured business loan, you won’t risk losing a specific piece of property you put up as collateral.

However, as we’ve mentioned, it’s important to note that many unsecured business lenders require personal guarantees or liens, which still leave you on the hook for the funds you owe.

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Larger Loan Amounts are Possible

In some scenarios, you might be getting a larger loan with an unsecured business loan than you would with a secured one. Why?

Well, with secured business loans, you typically can borrow only up to the value of the collateral you’re offering on the financing. For instance, if you collateralize the loan with a deposit of $100,000, you’ll probably only be approved for that amount.

That automatically limits how much you can borrow. Because unsecured business loans have no collateral to back them, you might be able to borrow more funds than would be possible if you offer collateral. With unsecured loans, your amount of funding will depend in large part on your credit profile.

Unsecured Business Loan Disadvantages

That said, there are some distinct downsides to taking on an unsecured business loan. Here are four cons to unsecured business loans to keep in mind:

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Higher Interest Rates

One of the biggest downsides to unsecured business loans is that they typically come with higher interest rates. This is because without collateral securing the loan, the loan is riskier for lenders to take on.

If you do default, the lender won’t have the collateral to seize to recoup their losses.

For this reason, lenders will charge higher interest rates. That way they’ll be sure to get most their money back through interest anyway.

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Personal Guarantees and Liens Still Apply

Personal guarantees and liens might still apply on unsecured business loans. These are other ways that lenders protect themselves when lending to borrowers. When you personally guarantee a loan, you’re committing to being personally liable for any funds not repaid to the lender by your business. A lien puts any and all business assets at risk if you can’t pay back the loan.

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Harder to Qualify

Securing a business loan with collateral gives some reassurance that the lender will get their money back. That means that your credit history, time in business, or business revenue might be less important to the lender.

On the other hand, if there’s nothing specific promising the lender that they’ll get their money back, then they’ll dig deeper into your credit history. Remember, your credit score essentially shows how reliable you are with paying back what you owe. If you have a poor credit score and you have no collateral to offer, lenders might be hesitant to work with you.

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Shorter Repayment Periods

Unsecured business loans typically come with shorter repayment periods than their secured counterparts.

That’s because lending money over a longer period of time is riskier for lenders than lending over a short amount of time. The future state of the market is more uncertain as you get farther into the future, so lenders are more protected if their money is out of their hands for a shorter period of time.

Again, it all comes down to risk—unsecured business loans are riskier, so they typically come with shorter repayment periods.


Common Unsecured Business Loan Misconceptions

When business owners set out on a search for unsecured business loans, they often do so with a few misconceptions. And though these technicalities might be nominal in certain circumstances, they can be game changers in other scenarios.

Let’s first clear the air and address three of the most common misconceptions business owners tend to have about unsecured business financing:

Misconception #1: Unsecured Business Loans Mean No Liability

Many business owners mistakenly believe that a business loan without collateral means there are no consequences if they’re unable to pay back the loan. There are very few non-recourse loans available, such as some merchant cash advances, but these can be extremely costly. Usually, lenders will require a personal guarantee or lien, even on an unsecured loan. If you default on an unsecured business loan, lenders won’t be limited to recouping their losses through specific pieces of collateral—instead, they could seek repayment through any of your assets as they see fit.

Misconception #2: Unsecured Business Loans Protect the Borrower

As we touched on with the first misconception about unsecured business loans, you’re not necessarily better off if you default on an unsecured business loan rather than a secured business loan. In reality, with a secured business loan, the lender can only seize the single collateralized asset as collateral. Meanwhile, a lender has much more free reign to pursue any assets you own—now or in the future—with unsecured business loans. If you default on an unsecured business loan, the lender can seek to recoup their losses and the legal costs of recouping those losses through your business and personal assets.

Misconception #3: Unsecured Business Loans Are Fully Unsecured

Most of the time, when a lender says they offer unsecured business loans, they really mean their loan doesn’t require a specific piece of collateral you need to offer. That’s great news if you don’t have a family home, large piece of equipment, or other high-value personal or business property to offer. But it doesn’t necessarily mean you’re off the hook in terms of liability in the event of a loan default.

Lenders can still use personal guarantees and liens to protect their investment in case your business can’t repay debts—and those options can pose an even greater risk to your personal finances than if you had offered your family home as collateral for your small business loan.


How to Get a Small Business Loan Unsecured by Collateral

If you’ve determined that you don’t have collateral to offer up for a secured business loan, then you might need to gear your search towards finding a small business loan unsecured by formal collateral.

If that’s the case, here’s what you should keep in mind as you search for unsecured business loans.

1. Do Your Research

Before you sign up for just any unsecured business loan, do your research and shop your options. Find the financing option with the lowest cost and best terms for your small business.

Additionally, you should be sure to read up on any potential lender you might work with—reading customer reviews could save you from signing a contract with a disreputable lender.

2. Check Your Credit Scores

Your ability to score an unsecured business loan directly depends on where both your personal and your business credit score stands. The more pristine your credit history—both as an individual and as a business—the better your odds are of getting a low-cost unsecured business loan.

Because a lack of collateral will make lending to your business through an unsecured business loan that much more risky for the lender, they will want to see that you have a solid, trustworthy track record as a borrower.

3. Prepare Your Unsecured Business Loan Application

The more you have to show to prove your reliability as a borrower and your ability to pay back, the better. So to increase your chances of finding a great unsecured business loan, offer as much financial information and documentation you can on your business loan application. This will include—but certainly won’t be limited to—credit scores, business bank statements, and business tax returns.

4. Read the Fine Print on Your Unsecured Business Loan Offer

Once you get an unsecured business loan offer, make sure to read the details on the agreement. While you won’t have to offer collateral, you might be putting your assets at risk in other ways that we discussed above, like a personal guarantee or a blanket lien. Make sure you know exactly what you’re getting into and pore over even the smallest fine print in your loan agreement before signing it.


Unsecured Business Loan Alternatives: Self-Securing Business Loans

By now, you might be thinking that the idea of getting a business loan without signing your life—or a major personal asset, at least—away is a pipe dream.

But, if your business needs happen to fit the necessary parameters, there are a few business loan options where the loan use acts as its own collateral—meaning, in most cases, that you won’t need to offer additional collateral or a personal guarantee.

Here are a few types of self-securing business loans that you should consider as ideal alternatives to unsecured business loans:

Equipment Financing

If your funding needs involve purchasing equipment for your small business, equipment financing could be a great choice. A small business equipment loan can be used for virtually any equipment need—from computers and software to production machinery, vehicles, and more.

Equipment loans work almost identically to a standard car loan: The amount you can borrow depends on the type of equipment, the price, and whether it’s new or used. Pretty intuitive.

These loans provide a perfect loophole for borrowers looking to avoid collateral or personal liability because the equipment itself acts as the collateral for the loan. If you default on the loan, the lender will seize the equipment, but your personal assets will be safe. And, if it comes to it, if your business has failed, you probably won’t be needing that equipment anyway.

Invoice Financing

With invoice financing, accounts receivable lenders advance you cash for your outstanding invoices. Some will take over the collection of the debt, some will not. Typically, invoice financing companies will give about 85% of the value of your invoices up front. The balance of the value, around 15%, will get returned to you at the end of the collection period, minus the fees retained by the company for its services.

If you’re a B2B company—and cash flow issues from unpaid invoices are a big reason why you’re looking for a business loan in the first place—then invoice financing is a great way to get capital without having to sign a personal guarantee. Because the invoices themselves act as the collateral, the most that can be collected is the initial amount of the invoice if the client never pays.

Inventory Financing

One last form of self-secured business financing is inventory financing, which business owners use to stock up on inventory that will act as collateral for the very funding used to purchase it. Inventory financing will be an ideal unsecured business loan alternative for retail businesses that sell tangible goods—because inventory financing relies on inventory, service-based businesses won’t have it as an option.

Just like equipment financing and invoice financing, though, inventory financing will allow business owners to access secured business loans without putting valuable personal assets on the line.


Unsecured Business Funding: The Bottom Line

Re risk of defaulting on a business loan is very real for business owners—especially those who fail to qualify for financing from a traditional bank. Acknowledging this risk isn’t meant to scare entrepreneurs away from pursuing debt financing—but it is important to think about all the factors involved before signing on the dotted line for a new business loan.

Unsecured business loans save you the trouble of having to offer a specific asset as collateral in exchange for a business loan. However, you could still be on the hook if your business fails. Lenders use alternatives, such as personal guarantees and blanket liens, to shore up their interests. Make sure that you read the fine print on any unsecured business loan and have a clear plan for paying it off.

Editor's Note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone. They haven’t been reviewed, approved, or otherwise endorsed by any of the companies mentioned above. Learn more about our editorial process and how we make money here.