What You Must Know About Unsecured Business Loans

Every business owner has the dream of growing their venture, whether it’s to hire more employees, put up new branches, or expand the inventory. However, all of these plans cannot become a reality unless you seek additional financing, which may come in the form of unsecured business loans.

This guide takes you through the basics of unsecured loans, intending to help you understand what it is and whether you can benefit from it.

Contents of this guide:

• What are unsecured business loans?
• Unsecured vs secured: what’s the difference?
• Types of unsecured loans
• Benefits of unsecured loans
• Risks of unsecured loans
• How can you qualify?
• Is it the right financing option for you?
• Frequently asked questions

What are unsecured business loans?

The most common type of loan offered by financial institutions is one that is backed up with any form of security or collateral. Conversely, unsecured business loans refer to commercial financing that does not require any form of collateral such as a property or vehicle. Instead, these loans are typically granted based on the business financial status and the creditworthiness of the borrower.

Simply put, unsecured loans will not have you pledging your assets to get this funding option. However, you have to keep a good credit score and healthy cash flow to have better chances of having your loan application approved. These loans are also called “character loan”, “good faith loan”, or “signature loan”, which gives insight into some of the criteria for this type of debt.

Unlike other business financing options, loans without security are commonly short-term only. Some lenders offer repayment schedules from three months to three years on average, depending on the factors set by the lending entity itself. 

At New York Tribeca Group (NYTG), you can avail yourself of an unsecured loan with flexible terms, ensuring that you have the best option fitting to your business plans. Many small and medium-sized companies in the US have thrived and succeeded with the help of our financing company.

How do they work?

Every business, whether it be a physical store or an online venture, needs a sound financial plan to survive and grow in a saturated market. However, there are situations like an investment opportunity or equipment breakdowns that can make you need immediate access to money. 

Unsecured business loans could be the best solution to these dilemmas, especially if you don’t have the means to qualify for a traditional loan. This alternative financing doesn’t require you to put up collateral, leaving that weight off of your shoulders.

NYTG acknowledges the significant role of small businesses in the country’s economy, prompting us to deliver accessible funding options for you. Our loans are designed for business owners who want a hassle-free loan application and processing that fits your busy schedule.

Our unsecured loans are handled by our expert account managers who will evaluate your request based on our criteria, and inform you in as fast as 24 hours whether you qualify or not. Once we come up with a financing option that works for you, we will then arrange the particulars of how you can claim your funds.

We offer digital solutions for our borrowers, ensuring that you can reach out to us at any time and wherever you may be.

Where to use an unsecured loan

Good faith loans can be utilized in many different ways and have a generally speedier process and approval. If you get this loan, you are expected to repay the amount plus a monthly interest (depending on the terms you agreed on) for a fixed period until you pay it off.

Here are some of the most common ways unsecured business loans are used:

• Maintaining or enhancing cash flow
• Business expansion
• Purchase of assets or stock inventories
• Maintenance or repair costs
• Renovations
• Marketing purposes
• Other one-off expenses

Secured vs. Unsecured Loans: What are the differences?

The key characteristic of unsecured loans is it does not ask you to put up collateral, unlike secured loans that are granted only to borrowers who put up a valuable asset for security. Here are some differences between these two types of loans.

Collateral

A secured loan is called as such because it requires collateral to attain it, which includes valuable assets like a house or car. In the event that you fail to repay, the lender can use the collateral to cover their potential losses.

Unsecured loans, on the other hand, aren’t tied to any piece of collateral, although it does require you to pass several criteria such as good credit standing and your business’ healthy financial status, among others.

Rate of interest

Another striking difference between these two loans is the rate of interest. Unsecured loans are more risky, so they will have a higher interest rate, however, interest rates will vary from one lender to another.

At NYTG, we have quick loans that start at 5.25% APR, ensuring affordable rates for you. You can reach out to our experts if you want to learn more about our loan programs and their corresponding rates of interest.

Loan amounts

Good faith loans are typically used for an immediate expense, which is part of the reason why they are offered at lower amounts compared to secured debts. Either way, you should keep in mind to choose the loan amount that you can afford to repay.

Types of unsecured loans

Term loans

When you find yourself needing a lump sum to cover your working capital, term loans are the best solution. Every financing agency or lender will have varying loan terms and repayment plans that will fit your capacity and cash flow. 

Unsecured term loans are usually offered in exchange for a personal guarantee, which is a promise made by the borrower, accepting liability if the business fails to repay the debt. However, other lenders may also provide revenue-based loans as long as the borrowing business can prove that it has the working capital to keep up with monthly payments.

Business line of credit

Alternatively, you can choose an unsecured line of credit, which is a great option for businesses that need cash on demand. Once approved, you can have access to funds at your disposal, much like the way credit cards work. 

With a business line of credit, you are given a maximum limit that you can borrow and will be charged interest for only the amount you spend. This type of unsecured loan is an ideal choice for when you need to improve your working capital or cash flow, allowing your business to stay afloat.

Invoice financing 

If you are having issues with your cash flow at the moment, invoice financing can be the solution. This unsecured business loan works by ‘exchanging’ your unpaid invoices for upfront cash. Basically, you are selling your unpaid invoices at around an 80-95% discount to the lender. You will then receive 5-20% once the customer pays their due. 

With invoice financing, you can free up the cash that’s tied down by unpaid invoices. It enables you to have more capital available to service new customers, cover daily expenses, and invest in your business’ growth.

Merchant cash advance

Lenders may offer merchant cash advance, which is a single sum equivalent to a portion of your forecasted sales. You are expected to repay this loan via future debit or credit card sales, or through fixed transfers directly from your bank account.

However, there is a significantly high risk for this unsecured loan. Interest rates can quickly balloon up to triple digits, which is why it’s not always a sound choice compared to the other types of loans.

Purchase order (PO) financing

Businesses struggling to fulfill purchase orders can try PO financing, which is when a financing company gives owners the working capital to pay vendors and suppliers. This loan provides business borrowers 100% or a slice of the cost it takes to fulfill an order.

Lenders like NYTG ensure that you can have a stable cash flow through PO financing, which also secures your tenure in the market.

Weighing the pros and cons

Is an unsecured loan the right choice for your business funding? Here is a quick look at the pros and cons that you can compare before applying for that loan.

Pros

• Simple application process
• No collateral
• Fast availability of funds (released as early as 48 hours)
• Nurtures trust and respect with the lender
• Improved credit history
• Less restrictions

Cons

• Higher interest rates
• Strict qualifications
• Lower loan amounts
• Shorter loan terms
• Penalties and additional charges

Benefits of unsecured loans

Unsecured business loans allow you quick access to cash, unlike other loan products that require a ton of paperwork and time for approval. It’s an excellent alternative if you are running short on cash but don’t want to use your assets, whether business or personal, as collateral.

With an unsecured loan, you don’t have to give up your property if your business defaults, however, you will also be held financially liable if your borrowing enterprise cannot fulfill the repayment terms.

Here are some of the benefits of getting an unsecured loan right when your business needs it the most.

Easy access

There’s a wide range of unsecured funding options available to you at any time you need quick cash for your business. Good faith loans are easier to access compared to traditional loans that require you to pass stringent lending criteria.

You can acquire funds by applying for unsecured loans even if you don’t have an asset to put up, giving you the chance at financing that you otherwise cannot access from a bank.

Fast and fuss-free process

If you have ever applied for a secured loan at a bank, you would know that it is a grueling and time-consuming process. For unsecured loans, the application and approval times are shorter since it does not require collateral. The lender will not have to value and itemize assets that you put up as security.

Although the process differs per lender, it’s generally quick and simple to get an unsecured loan. New York Tribeca Group expedites the process as soon as you fill out the forms online, which takes only minutes. After signing the closing documents, you can get the funds right away.

No collateral

One of the main benefits of unsecured loans is that you don’t have to put up security. You still have access to funding without having to offer your personal or business assets as collateral. This type of loan allows you to liquidate or upgrade your existing equipment since they are not tied down to debt. 

With secured loans, the lender can issue a court order to seize your security when your business defaults. This scenario is one you would not have to go through if you choose unsecured business loans, although you do have to guarantee your capacity to repay the debt without collateral.

Less restrictions on usage

Unsecured business loans are free from overly strict restrictions, which only ask you not to spend the money for any illegal activity like buying securities or gambling. Therefore, you have full reign on where you allot the money, as long as it relates to the borrowing business.

Better lender-borrower relationship

When our financing company approves your unsecured loan application, it is showing a high level of respect and trust between both parties. Once you repay your loan, you can nurture a stronger bond with the lender and expect to get fast approval for your future applications. It could mean better terms for your future loans.

Discharged loan in case of bankruptcy

In the unfortunate circumstance that your business must file for bankruptcy, unsecured loans might be discharged by the court. However, it would be to your advantage if you settle your debt diligently to keep a clean record and earn the trust of your lender and other financial institutions as well.

Improved business credit score

Good faith loans are almost always granted for people with good credit standing, along with the healthy financial status of their business. When you meet your repayment terms satisfactorily, you are also building a better credit history. It further helps you improve the credit score of your business, allowing you to obtain loans easily in the future.

Risks of unsecured loans

The high-risk nature of unsecured loans sets a high bar for anyone that’s interested. While these debts are short-term and have varying terms depending on the lender, there are common disadvantages to these loans. 

Your creditworthiness and cash flow health matter greatly in unsecured loans. The bank statements, outflows and inflows, and existing commitments of your business will be thoroughly assessed. These factors will determine the amount that the lender can comfortably offer you.

As with any loan type, unsecured business loans have major caveats that you must know before you decide that it’s the right funding option for your enterprise.

Higher interest rates

Lenders treat unsecured loans as a much riskier choice than secured business loans, which explains the higher rates of interest. Some of the factors that affect rates of interest include the monthly turnover of the business, credit history, and the number of months or years the borrowing business has been trading for. 

In general, you would likely be paying a higher interest rate for an unsecured loan than a traditional one of the same amount but with a relatively lower interest.

Smaller loan amounts

Most lenders would only offer a lower loan amount to mitigate the high risk that comes with an unsecured loan. As a business owner, you can expect to be offered less cash than when getting a secured debt.

However, there are many good faith loan products enough to cover your most pressing needs. For instance, invoice financing from NYTG boasts a maximum loan amount of $5 million, which can help you comfortably bridge the gaps in your cash flow.

Short repayment term

The high risk that comes from character loans makes it necessary for lenders to implement stricter repayment schedules. If you are getting this loan, you are usually expected to repay the debt at shorter and more frequent intervals. You must be prepared to pay off your loan quickly.

Strict requirements

Unsecured business loans don’t require you to put up collateral, which prompts lenders to look into your financial standing. If you or your enterprise have bad credit, your application will likely be rejected.

However, lenders can also focus more on the annual revenue of your business rather than your credit score. For example, if it is doing well in online or credit card sales, your borrowing business may have enough funds to qualify for an unsecured loan.

Repayment penalties

Some lenders apply a minimum stay-in period or additional fees to prevent borrowers from paying back the loan too quickly. In essence, the lender can benefit from the potential interest accrued on a loan, which is why they will typically dissuade you as a borrower to repay outside of the agreed terms.

How can you qualify?

There are different sets of qualifications for every financing company, but there are common factors you must consider if you want to get an unsecured loan.

Business income

For any borrowing business, it’s crucial to provide records of your past revenue. Most good faith loans require a sizable income to determine whether you are capable of handling the repayment terms. 

However, there are lenders that offer financial help to startups with less to no minimum annual revenue. Other companies will look at the projected yearly income before approving any loan application. It all varies on the lender’s existing loan criteria.

Age of the business

A financing company will also factor in how long your business has been running throughout the processing of your loan. A relatively young enterprise may find it more difficult to qualify, although it’s not always the case.

The typical time in business it takes to get approval for unsecured business loans is two years. Startups and small businesses with less than twelve months of revenue may still be eligible for it if they can pass other important criteria set by the lender.

Minimum credit score

As character loans don’t require security, lenders will take into careful consideration the credit score of the business and its owner. While it varies for every financing company, you’ll have a higher chance of approval if you keep a good credit standing, both personal and business.

Loan purpose

When you are borrowing money for your venture, the lender will want to know where you are planning to use the funds. Some lending agencies will evaluate the loan purpose and factor it into the decision regarding your application. 

Worthwhile spending of the funds, especially for business growth or sustenance, can have a positive impact on the process of loan approval.

What reasons can get your application rejected?

Lenders require stricter eligibility criteria for high-risk unsecured loans, especially if it is your first few attempts of seeking help from a financing company. Here are some reasons that can prompt the lender to decline your loan application.

• Bad credit score
• Outstanding debts (personal or business)
• Relatively young businesses or startups
• Seasonal businesses
• Weakly performing industry
• Inconsistent business income

Is it the right option for you?

Unsecured business loans can work for or against your favor—it all depends on both your need and capacity to handle the loan on the terms stipulated by the lender. 

Here are some questions you can ask yourself before applying for a loan.

What is the purpose of the funding?

Having a detailed purpose of how you will be using the loan, say buying more property, adding to your inventory, or upgrading your technology, can receive a more favorable response from the lender. 

On the other hand, if you are planning to use the fund to pay off another debt or purchase a non-essential asset for your business, the lender might have less confidence in letting you borrow from them.

How much do I need?

While you are in control of the loan amount you wish to appropriate, you also have to be sure that you’re not aiming too low or too high for the sake of your business. If you fall short on your estimate, you might have to loan again soon, which can question your acumen as a business owner.

Conversely, if you overestimate the loan amount, the lender could be wary of your capacity to repay it. Your economic responsibility will be put in question, too.

What paperwork should I prepare?

Aside from filling out the application form, you should also submit the paperwork required by the lender. If you decide to take out a loan, you have to prepare all the necessary documents that prove your financial health. 

Some of the paperwork you should have in advance include a comprehensive business plan, profit and loss statements, cash flow statements, balance sheets, and documents indicating reasonable projections for your business.

You may also be asked to present your financial information, which will have you showing your tax returns for up to three years, depending on what the lender requires.

Your options for unsecured loans

• Loan type. There are several choices under unsecured business loans. You should find what fits your immediate need the most, be it a business line of credit, a term loan, invoice financing, or another form of unsecured loan.
• Loan limit. Not all financing companies can lend you the right amount of money you need. It’s best to choose an unsecured loan that helps you sustain a good working capital and cash flow.
• Costs. Carefully review the costs and charges that come with your loan. In general, loans that will cost less, in the long run, can be the most useful for your business. Some of these fees include down payment, interest rate, origination fees, and additional fees set by the lender.
• Length of the repayment term. Shorter repayments can mean that you have to pay higher monthly dues. When seeking a loan, you should also be wary of the payment schedule along with the term length.
• Customer service. A good lending agency offers outstanding customer service because it boosts its credibility in the market. Trust is a two-way street in lending, so it’s vital that you can rely on your lender as much as they can trust you.

Frequently asked questions

How will my creditworthiness be assessed?

 For any type of loan, your credit score can become a deciding point for lenders when deciding to approve or reject your application. Here are the important C’s a financing company often assess before lending you the money that you need:

• Character. For unsecured business loans, character can mean your credit score, business plan, your business history, and other relevant information about your company such as customer reviews. 
• Capacity. Your cash flow impacts a lender’s decision because it is a good indicator of your capacity to repay your loan.
• Capital. Lenders prefer borrowers who have made significant financial investments throughout their time in business, especially if you built up the capital for your venture on your own.
• Conditions. Every borrowing business has a unique need and situation that a lender will evaluate, including whether your plans for the funds can succeed, given the current status of the economic environment.

How long will the application take? 

Our financing company offers financial solutions with a quick application process. You can fill out the form through our website in as fast as five minutes, and we will start evaluating immediately. Our team understands that time is of the essence for you and your business.

With less paperwork due to the lack of collateral in unsecured loans, you may know if your application is approved or rejected in just a few hours.

What happens if I default on my unsecured loan?

Even if you did not put up collateral for the unsecured loan, the lender can still impose penalties and other consequences if you fail to pay. For instance, you can be facing legal action from the lender, which can help them reclaim a portion or all of the loan amount.

Can I pay off the loan early?

In general, you are allowed to pay off your loan early, but lenders will typically dissuade you from doing so. You might have the option of paying back the remaining principal but will still get charged for the interest of the term. Other lenders will require a minimum lock-in period.

However, it would be best to stick with your repayment terms to avoid unnecessary charges. Observing the terms can further improve your relationship with the lender, too.

Are there unsecured loans for bad credit

It’s challenging for people to acquire good faith loans with a poor credit score, although it’s not impossible. If your business has had a stable annual revenue for many years, the lenders may not treat your credit history as a major roadblock to getting a loan.

If you want to improve your chances of having your application approved, you can seek out a co-signer who would be willing to share the responsibility for the loan. Additionally, financing companies like NYTG are willing to help out small businesses with many unsecured loan options that work on your credit range and capacity.

Final thoughts

Your business can benefit greatly from unsecured business loans, especially if you are looking to expand your venture or sustain a healthy working capital. There is a wide range of loan products that you can choose from. The key is to pick the right one that will foster the growth of your business.

Before you decide, it’s crucial to weigh the advantages and disadvantages of unsecured loans. Will it be worth taking the risk? Are you confident that you can diligently observe repayment terms and maintain your good credit score? These are some of the questions that you should clearly answer before signing that closing document.

Unsecured business loans: Let’s break it down

Unsecured business loans are highly desired and for good reason. If the borrower defaults on a payment, their assets aren’t at risk… right away.

With unsecured business loans, you do not need to stake collateral against the money you borrowed. In a secured loan, or collateralized loan, you do need to put up assets to help lessen the risk the lender is taking in letting you borrow money. Assets are commonly real estate, vehicles, or large equipment and machinery, but can also be other forms of property such as marketable securities, invoices, and other cash or non-cash items.

Some business owners would rather not risk their other property on a loan and search for an unsecured business loan. However, unsecured doesn’t always mean it’s the best option. A secured loan might be offered because a low credit score labels a business as risky and a safety backing is needed. Or, a secured loan might be offered because it comes with lower rates and longer terms, or even higher amounts. This security can allow the lender to offer more preferable rates and terms.

Additionally, an unsecured business loan does not mean your possessions are untouchable, they are just harder to get. Should you default on payment on unsecured business loans, the lender cannot immediately seize your property, however with due legal process, they may still be entitled to recouping their losses.

If you see no reason why you wouldn’t be able to make your payments, then a secured business loan can help save you money on interest. If you prefer an unsecured business loan, here’s everything you need to know including the top unsecured business loans.

Minorities & Unsecured Business Loans

A 2010 study done by the Minority Business Development Agency titled “Disparities in Capital Access between Minority and Non-Minority-Owned Businesses” determined that minority-owned firms are more likely to be denied loans.

Among firms with gross receipts under $500,000, loan denial rates for minority firms were at 42% compared to those of non-minority-owned firms at 16%. For high sales firms, the rate of loan denial was almost twice as high for minority firms as for non-minority firms
Loan rejection and acceptance comes down to the bank qualifications. Banks require large amounts of collateral, high credit scores and strong revenue, which can be hard to obtain depending on your socioeconomic standing. Despite small businesses being a vital part of the economy of diverse communities, banks do not commonly give out loans to these minority-owned businesses. Unsecured business loans for minorities are increasingly common for these reasons.

Top Unsecured Business Loans

Whether you don’t have any assets to pledge or you simply don’t want to, the top unsecured business loans can get your business the capital it needs to grow without staking valuable property. Every provider will have different requirements and offers. Here are the top unsecured business loans for you to compare options:

Kabbage

Kabbage offers unsecured business lines of credit ranging from $2,000 to $250,000. This fast funding comes at rates of 1.5% to 10%, and keep in mind with a business line of credit, you only pay interest or advance fees on what you borrow. To qualify, your business will need to be minimum one year old with minimum $50,000 in annual revenue. Credit scores of 550 are accepted, so it’s okay so have poor credit. While Kabbage is an unsecured business line of credit, a personal guarantee is required. This means that your personal assets could be seized if you default on a payment and your business does not have enough assets to pay pack the lender.

OnDeck

OnDeck Capital offers both short-term unsecured business loans and unsecured lines of credit. Financing from $5,000 to $500,000 can be put in our bank account in a matter of days with interest rates range from 13.99% to 36%, or as low as 9% if you’re a strong borrower offered their special prime rate. Loans range from three to 36 months, but if you decide to pay off your loan early you will still owe the full interest amount. OnDeck requires a minimum of one year in business with annual revenue of $100,000. Compared to Kabbage, you can get more money for lower rates, but you’ll still need to sign a personal guarantee in case your business defaults.

BlueVine

While BlueVine is well known for its invoice-backed financing, the funder also provides unsecured business lines of credit for up to $250,000. You’ll need to have been in business for at least six months with a minimum credit score of 650 and minimum $100,000 in annual revenue. BlueVine has weekly or monthly repayment options over terms from six to twelve months and simple interest as low as 4.8%. This financing is unsecured, but BlueVine will still need some time of security when lending out $5,000 to $250,000. To do this, the funder requires a personal guarantee as well as a blanket UCC filing. A blanket UCC means if your business goes under, they are first in line to collect your business assets before anyone else who provided your business with financing.

FundBox

Startups have the hardest time finding financing due to lack of history and lack of assets, but with FundBox, businesses only need to be in operation for six months before applying. FundBox offers unsecured business lines of credit for up to $100,000. Businesses fund with FundBox because there are no additional fees such as origination fees or underwriting fees. Interest rates starting at 4.66% put them on par with their competitors. As for terms, FundBox is on the shorter side with 12 to 24 week terms for revolving credit, you can re-borrow principal as many times as you repay it. Collateral varies; you might have a blanket UCC filing, you might need a personal guarantee for larger amounts. This lack of security is why FundBox has shorter terms and smaller amounts than competitors.

Lending Club

For medium-term unsecured business loans, Lending Club is the best choice for businesses. Business owners can get an uncollateralized loan for$2,000 and $250,000. Interest rates start at 7.9%, similar to a bank, but as a drawback they do charge an origination fee. To get these favorable rates and longer terms, you’ll need to have strong credit of 620+, strong revenue of $50,000 or more annually, and at least one year in business. If you meet these qualifications, you could receive $5,000 to $300,000 for one to five years at rates ranging from 5.9% – 25.9%. Lending Club can provide fast funding, but you’ll want to make sure your business doesn’t have any financial bankruptcies in its recent history.

New York Tribeca Group

New York Tribeca Group provides unsecured business loans through two means: matching making business to another loan provider or through a merchant cash advance funding. Merchant cash advances are unsecured because they use a COJ, meaning you don’t need collateral but if you default the funder can still recoup its losses through your business’s assets. While New York Tribeca Group can provide funding for up to $5,000,000, an unsecured loan would go up to $2,000,000 with buy rates ranging from 14 – 32%. To qualify, you’ll need a minimum of 520 credit score and $50,000 in annual revenue with six months in business. The stronger you are in each of these categories, the more likely you are to get more money with lower rates.

Pros and Cons of Unsecured Business Loans

Unsecured funding is enticing, it appears on the surface to have little to no risk for the borrower. But while it is a highly sought after financing option, there are pros and cons to weigh.

Pros

– Helps startup and minority businesses that may not have enough assets for a bank loan
– Fast and easy with minimal paperwork
– Business assets are not directly at risk
– More dependent on credit score than the liquidity of assets, allowing higher amounts than what assets owned can back.

Cons

– Higher interest rates to lessen the risk of the lender
– Still secured either through personal guarantee, blanket UCC filing or COJ
– Credit score and history is much more important to qualify
– Shorter terms to lessen the risk of the lender

The main takeaway of researching the top unsecured business loans should be that even though the loan is uncollateralized, your business will still have effects if you default. An unsecured loan should not be a way to save your business assets if you are unsure if you can pay it back, but rather allow you to receive funding if you have no assets or need more than your assets can back. A personal guarantee on a loan means you will need to provide collateral if your business cannot. For this reason, many business owners turn to unsecured business lines of credit to ensure they only spend what they can payback.