How hard is it to get an unsecured business loan?

Many business loans require assets like real estate or expensive equipment as collateral. This means the lender can seize those assets if you don’t repay what you borrowed. But if you don’t have personal or business assets to put up as collateral or don’t want to put those assets on the line, you have another option — an unsecured business loan.

That might sound appealing, but getting an unsecured business loan isn’t always easy. If you’re a new business, have bad credit or don’t want to put your personal or business assets on the line to back the loan, it gets even more difficult.

Types of unsecured small business loans

The best unsecured business loans offer flexible financing without the risk of putting assets on the line. But some types of unsecured business loans are easier to qualify for than others.

SBA loans

The U.S. Small Business Administration (SBA) backs these loans, making them less risky and potentially more accessible to borrowers. They also tend to have lower interest rates than most small business financing options. But without collateral, most SBA loans max out at $25,000, and borrowers can face tough eligibility criteria and lengthy loan application processes.

Term loan

Term loans let you borrow a lump sum you pay back over a set period, generally with a fixed interest rate. To qualify for these types of unsecured business loans, you need to meet the specific eligibility criteria laid out by that lender.

Banks and credit unions tend to have the best rates and long repayment terms but are typically only available to established businesses with good credit. Online lenders are more accessible but may offer smaller loan amounts and charge higher rates and fees.

Business lines of credit

A business line of credit works almost like a business credit card. You have a maximum amount of revolving credit you can draw against. You can then take as much from that pool as you need and only pay interest on what you draw.

Like a term loan, you’ll need to show that your business is consistently profitable and has good credit to get the best business line of credit rates. If you repay the credit line before the drawing period concludes, you can borrow from it again. Small business owners won’t have to pay additional origination fees to borrow from the same credit line, a key distinction from term loans.

Invoice factoring

With invoice factoring, you sell your unpaid invoices to a factoring company, which pays you a percentage of outstanding invoices (anywhere from 70 percent to 90 percent). Your invoiced client then pays the factoring company what it owes.

This is one of the most accessible types of business loans since factoring companies care more about the creditworthiness of your clients than your credit score and business financials. But you lose out on getting the full value of what you were owed, and the fees can get high.

A key detail is that invoice factoring companies reach out to clients on your behalf to collect payments. This can be good in some cases, as you’re delegating the task to the factoring company. However, if the invoice factoring company doesn’t treat your clients with respect, you can end up losing business.

Business credit cards

Business credit cards provide revolving lines of credit. They’re typically only available to business owners with good or excellent credit, and loan amounts aren’t as high as some term loans. But they’re available to startups with some features you won’t find with business loans. This includes a grace period that lets you pay off your debt without paying interest as long as you pay your balance in full. Many business credit cards also earn rewards and offer generous sign-up bonuses.

Many business credit cards also earn rewards, offer generous sign-up bonuses, and provide discounts for many business tools and software. Some business credit card issuers will also periodically raise your credit limit as you make on-time payments without triggering a hard credit check.

Merchant cash advances

Merchant cash advances give you a lump sum you repay with a portion of your credit card sales. This provides a quick infusion of cash to help businesses facing sudden emergencies or seasonal cash shortages.

The rates and fees for merchant cash advances can soar higher than other types of business loans. If you can’t pay these back quickly, you could become stuck in debt.

How hard is it to get an unsecured business loan?

If you have strong personal and business credit, you’ve been in business for two years or longer, and you can show consistent revenue, most lenders will see you as a low-risk borrower. So, you’ll have an easier time qualifying for a loan without providing personal or business collateral.

But for other types of borrowers, you could hit some roadblocks.

Unsecured business loans for startups

New businesses have limited options for unsecured business loans beyond business credit cards, invoice factoring and merchant cash advances. Most unsecured term loans and lines of credit require a business to be established for two or more years.

Equipment loans are an option if you don’t have assets to offer. That’s because the equipment you purchase acts as collateral to secure the loan. This is one of the few types of loans often available to startups.

Even if a startup is willing to provide collateral, securing financing can still be difficult. Lenders willing to work with startups tend to require at least six months in business.

Unsecured business loans for bad credit

The best bad credit business loans tend to come from online lenders since most banks and credit unions may only work with business owners with good credit.

Merchant cash advances and invoice factoring are options for business owners with bad credit. But, like startups, getting an unsecured term loan or line of credit won’t be easy. And most business credit cards require good or excellent credit.

Offering collateral can lessen some of the risk a lender takes on providing funds to someone with poor credit. It can also help you secure the lowest possible rate you qualify for.

Fast unsecured business loans

If you need a fast business loan, you should avoid SBA loans. These generally come with a long application process. Term loans from banks and credit unions might also take longer than you want.

Online lenders typically work faster and often don’t require extensive loan documentation. Funds could hit your business bank account in one to three business days. Be advised, though, that these lenders often charge higher interest rates than traditional lending institutions.

You’ll be in your best shape to get that fast unsecured business loan if your business can show steady or growing revenue in recent years.

Unsecured SBA loans

While secured SBA loans can total millions of dollars, if you want to get an unsecured business loan, that ceiling gets a lot lower.

7(a) loans, some of the most common SBA loans, come with a maximum amount of $25,000 if you don’t want to put up collateral. Loans through the SBA’s Community Advantage program can go up to $50,000 without requiring the lender to take collateral. But if you want to go above that, you’ll need to be ready to secure the loan somehow.

Even though the SBA doesn’t require collateral for certain loans, the final decision rests with the lender providing the funds. Check to make sure a lender offers unsecured SBA loans before applying.

Unsecured business loans with no personal guarantee

If you’re looking into an unsecured business loan because your business doesn’t have the assets to collateralize the loan, you will likely find lenders asking you to personally guarantee the loan. That means putting your personal assets on the line if you default on the business loan.

It’s highly unlikely you’ll be able to get an unsecured business loan without a personal guarantee. If you have an established business and have great credit, you may find a lender willing to offer an unsecured loan with no personal guarantee, but the rates and terms won’t be as good.

For everyone else, these completely unsecured loans are extremely hard to come by. Even business credit cards may require a personal guarantee, especially if you don’t have the best credit.

Pros and cons of unsecured business loans

Before signing a loan agreement for an unsecured business loan, compare the pros and cons to make sure it’s the right type of business loan for your business’s needs.

Pros

• Assets not required to secure the loan
• Funding as fast as one to two business days may be available
• Suitable for a wide variety of borrowers

Cons

• Potentially high interest rates
• May have strict lending requirements
• Personal guarantee may be required

To learn more, check out our guide on the pros and cons of unsecured business loans.

Alternatives to unsecured business loans

If an unsecured business loan isn’t the best fit for your business, here are a few alternatives to consider. 

• Secured term loans: Businesses receive one lump sum with lower interest and extended terms. This option is suitable for significant purchases, such as real estate, equipment, machinery and more, with the asset securing the loan.
• SBA loans: With SBA loans, you get access to loans up to $5.5 million for various business purposes, and if the loan is over $25,000, it will likely require collateral.
• Secured lines of credit: Similar to business credit cards or unsecured business lines of credit, secured lines of credit provide a predetermined amount of revolving credit secured by collateral.
• Invoice financing: Businesses can borrow against accounts receivable or unpaid invoices and get quick cash. Due to the high fees, this option is ideal for short-term cash flow issues.
• Business grants: Small business grants are a great way for businesses to avoid taking on debt since these funds don’t require repayment, but many are designated for specific types of business owners, including veterans, minorities and women, making them more competitive.
• Crowdfunding: You can raise capital by fundraising on a crowdfunding platform. Typically, it is in exchange for rewards or equity.
• Peer-to-peer lending: Through online platforms like Kiva and Funding Circle, businesses can secure a loan from individuals or businesses rather than a direct lender. This alternative comes with flexible requirements, making it a good fit for borrowers with less-than-perfect credit.

Bottom line

An unsecured business loan can help you protect your business assets in the event of a default. These loans are generally harder to get and come with higher interest rates. And if you do get one, managing an unsecured business loan well is important to protect your company’s financial future.

Frequently asked questions

• Do banks offer unsecured business loans?

  They do — but not to everyone. Traditional lending institutions like banks will generally have stringent qualification criteria, including good business and personal credit scores, at least two years in business and consistent business revenue. They may also require a personal guarantee.

• Is it harder to get an unsecured business loan?

  Getting an unsecured business loan can be hard, especially if you are a startup business or business owner with bad credit. The collateral you put up to secure a business loan goes a long way to lower risk for the lender. Without anything from you to back the loan, the lender will be more hesitant to offer you the money. And even if they do, you should be prepared for higher unsecured business loan rates than if you went with secured financing.

• How do unsecured business loans work?

  These loans function a lot like other types of business financing. You apply, and the lender vets you based on their specific eligibility criteria. If you get approved, they issue you the money, and you pay back what you borrowed — plus interest and fees — on the agreed-upon timeline. But because there’s no collateral at play, that interest rate is generally higher than secured financing options.