SBA.com is an independently owned and operated website and has no government affiliation.

Unsecured Business Loans

The decision to start a small business instead of working for someone else is a brave, but tough step. It is certainly risk prone. Not only do you have to start at ground zero, but you may be starting with little-to-no prior experience or even a consistent cash flow to sustain your business. It takes some time for your business to begin to generate some revenue and for the ups and downs to stabilize. There is not any guarantee that a profit will be obtained or that your business will ever make a name for itself. If you are starting a business or planning to, and are looking towards securing a loan, you should be familiar with the pros and cons of secured business loans vs. unsecured business loans.

Secured vs. Unsecured Business Loans 

A secured business loan is pledged or “secured” against some asset of the borrower, which can be sold to cover the cost of the loan by the lending institution if the borrower defaults. On the other hand, an unsecured business loan is a monetary loan and is not secured against any asset, hard/tangible or otherwise. In addition to the critical difference coinciding with the fact that not any collateral is required to secure the loan, another advantage is that the borrower is only charged some interest on the amount borrowed.

Unsecured business loans are available in the following different financial categories or packages from a lending firm or bank, such as:

  • Credit cards
  • Personal loans
  • Corporate bonds
  • Payday loans

How the interest rate is applied depends on the lender, as well as the credit history of the borrower.

Interest Rates in Unsecured Business Loans

The interest rates charged on unsecured business loans are nearly always higher when compared to secured business loans. This is because in case of the latter type of loan, it is a sure thing that, one way or the other, the lender will be repaid. The same is not the case with unsecured business loans. In these, the lender’s options for recourse are severely limited in the event that the borrower defaults. The higher interest rates are a symbol of the additional risk factor involved for the creditor.

Proving Your Worth

So why should the lender loan you any money if the repayment lies on shaky grounds? That is what you have to work on. When applying for the loan, make sure that you have a good business credit report. If you are organized and convincing while promoting your business plan, the chances of obtaining your loan increase. Every lender will look at your past credit report for a reference, so try to pay your bills on time (yes, this is obvious). You may want to apply for more than just one loan, perhaps from different lenders, to get the best rates and repayment terms. For instance, a longer-term loan will typically offer lower interest rates because the lender is able to recoup more interest over the life of the loan. Some long-term loans may even add extra fees if the loan is paid off early, so be sure to read the fine print.

It All Depends on You

Many people suggest that for starters, it is a better option to opt for a secured business loan, because the added tension of having an outstanding loan and not being able to pay it back is worrisome. Of course losing your car or home is not a good option either. With unsecured business loans, it is not required to have the assets to cover the value of the loan. Only a positive credit report and the willingness to succeed is enough, at least in the initial stages.