Most small business loans are traditional, secured loans from banks. Increasingly, however, small business owners are looking into unsecured financing alternatives.
What are unsecured business loans?
With an unsecured business loan, a business owner can borrow money without using assets as collateral. Although the lender will have a general claim on assets in the case of failed repayments, this form of loan might be received without a personal guarantee and is a quick way to inject cash into a business.
Speed might be especially important for small businesses with temporary cashflow difficulties. A loan can also help a small firm expand through improvements to its site, equipment or workforce. Other small businesses might seek relatively small unsecured loans in order to improve their credit ratings and pursue larger loans in future.
Eligibility requirements for unsecured business loans vary from lender to lender. In general, it can be helpful if the business applying for the loan has been trading for at least six months, is registered, with a bank account, and can show some sales history. For some lenders, not all of these elements will be required.
An alternative to an unsecured business loan is a partially unsecured business loan. This type of loan is particularly worth considering in the case of a business with poor credit or limited history. This is because securing part of the loan can strengthen an application. It may also result in lower interest rates.
A second alternative might be a peer to peer loan. A company offering this kind of loan circumvents traditional banking by facilitating communication between businesses seeking funds and individuals looking for investment opportunities. Typically, a business will require a good credit history and will have been well-established to qualify for this kind of product.
Pros and cons
It's important for business owners to be aware of all their options and to choose the plan that is best for them. As with any loan product, unsecured loans have advantages to be weighed against potential disadvantages.
- The lender takes the risk.
- If the borrower becomes bankrupt, unsecured creditors typically realise a smaller proportion of their claims than their secured counterparts.
- A loan can be approved in minutes and it's sometimes possible for the funds to be received within 24 hours.
- Due to the risk being carried by the lender, these loans have understandably higher rates of interest.
- Borrowers may not be able to borrow so much as would be possible with a secured loan.
When looking for a supplier of an unsecured business loan, look out for a simple, transparent pricing agreement, with no hidden fees or unreasonable early repayment penalties. You should also be able to get your answer fast, within a few minutes even, since top firms use modern technology to assess their potential clients' suitability. While the computers take care of your assessment, try to ensure that you can talk to someone about your account should you need to.
Here are 4 top providers of unsecured business loans
- PayPal Working Capital
- Rapid Advance
This lender assists businesses with their cashflow by advancing funds in order to immediately clear the business' outstanding invoices. It's very fast for businesses to set up, with approval possible in just a few minutes and funds potentially transferred within 24 hours. Businesses can borrow anything from $100 to $25K, payable within 3 months. Approximate APR is between 38% and 54%.
In order to qualify with Fundbox, a business needs to have been trading for 6 months and must invoice using leading bookkeeping software.
This lender is good at helping small businesses make small purchases of goods and/or services. They pay vendors on business' behalf. Any registered US business with an SSN and a bank account is eligible and can borrow up to $50K for up to 6 months with an APR of 33%.
PayPal Working Capital
As the name suggests, this lender is for PayPal merchants. Eligibility in this case comes in the form of 3 months' of PayPal transaction history and $20k in PayPal sales. Approval can take 5 minutes and funds of up to $85K can be transferred instantly into a PayPal merchant account.
This firm provides merchant cash advance loans. This might be a good option for a business that has exhausted every other option and performs many credit card transactions. Firms can be approved within 2 days and receive funds of between $5K and $500K in 3 - 5 days.
Visa/Mastercard sales of $2500 per month and a 1 year lease and a credit score of 500 are required to be eligible. Businesses will have to pay back their advances within 4 - 12 months and APR ranges from 29% to 132%. Repayments can be expensive, but pricing is transparent and payments only need to be made on days the business has sales.