How to manage an unsecured business loan

Written by

TJ Porter,

Edited by

Published on May 24, 2024 | 5 min read

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Key takeaways

Understanding your loan agreement is a must if you want to successfully manage your unsecured business loan
Follow a budget and avoid taking on too much debt while repaying the loan
Always talk to your lender if you're having difficulty with making payments

Unsecured business loans are one of the most versatile sources of funding for your business. You can use these loans for anything from paying immediate bills to hiring employees to investing in growth, and they don’t require personal or business collateral. Because these loans are riskier for the lender, they can come with higher rates than secured business loans.

To get the most out of your loan, you’ll need to manage it properly. If you fail to understand the terms of your loan or pay on time, it could cost your business a lot of money, damage your credit and lead to far worse consequences.

To ensure that doesn’t happen, read on to learn more about how to manage your unsecured business loan.

6 tips to manage your unsecured business loan

1. Read your loan agreement

Before you sign any legal document, it’s important to make sure that you read it carefully and fully understand it.

Your loan agreement will outline how your loan works. You’ll see sections that show how interest is calculated when your payments are due and any loan fees. It also describes what happens if you miss a payment or have other problems with the loan.

Some common areas to look for in the agreement are:

Terms and conditions	The basic details of the loan include the amount, the term, the interest rate, and any fees, such as origination or early repayment fees.
Penalties for nonpayment	This outlines the fees and penalties you’ll deal with if you miss payments. It may also indicate the loan’s grace period if there is one.
Acceleration clause	This clause describes how the lender can demand immediate payment of the loan’s full balance if you default on the loan.

2. Follow a budget

A business budget is an essential tool that gives business owners a true understanding of their financial status and the power to manage their businesses effectively. The budget should describe how much money the company makes, how much it spends, where it comes from and where it goes.

Make sure that your new loan payment fits your monthly, quarterly and annual budgets and update your budgets over time as your situation changes.

Each business will budget in different ways; some popular budgeting strategies include:

Master budget	This is a single master financial document that contains all of the company’s financial information, usually for a full year. It may have various lower-level budgets focusing on specific things, like labor or sales.
Operating budget	This is a basic method of budgeting that looks at a company’s revenue and expenses over a period of time.
Cash budget	A cash budget looks at a business’s cash inflows and outflows over a set period, such as weekly, monthly or quarterly.
Zero-based budget	Zero-based budgeting sets the budget for every spending category at $0 at the beginning of each period. You then must justify the spending each period. This is a useful method for making sure your company uses funds as effectively as possible, but takes effort.

3. Pay your bills on-time

Paying your bill on time avoids additional fees, penalty interest rates and damage to your credit. Given the importance of timely payments, consider setting up automatic loan payments whenever possible or creating reminders about upcoming due dates.

Should you pay more than the minimum each month?

Paying more than the minimum can be a good idea for some companies. Larger payments mean you’ll pay the loan off sooner than expected and get out of debt sooner. It will also reduce the amount of interest that accrues, saving you money.

But there are cases where it isn’t a good idea. First, check to ensure your loan doesn’t have a prepayment penalty. If the lender charges it, you’ll pay a fee if you repay your loan early. You’ll also want to confirm the type of interest your loan has and how your payments are applied to your loan balance. If your loan has a factor rate applied instead of an interest rate, paying the loan off early won’t actually save you any money. A factor rate is applied to the initial balance, and early repayment won’t reduce the fee.

You also have to consider your company’s cash flow. If you put too much money toward loan payments, you might not have enough to cover other expenses. You’ll also want to consider opportunity cost. You might be able to use your extra cash more effectively, generating business growth that leads to more profits than the money you’d save by making extra loan payments.

4. Avoid having too much debt

Some debt isn’t necessarily a bad thing. Proper use of credit can help you grow your business more quickly, and you can use your new revenues to make loan payments.

But if you borrow too much, you could be left with large loan payments that are hard to make. You’ll also face large interest charges and a dip in your credit score.

It’s better to limit your borrowing and grow at a slower, more sustainable pace than to try to borrow too much and put pressure on your company to make big loan payments.

5. Check your credit

Before applying for any loan, check your personal and business credit score. See if there are any errors on the report that you can get removed or if there is anything you can do to give your score a quick boost. That can help you secure a lower cost for your loans.

You should also monitor your credit score as you are paying off your unsecured business loan to make sure you are quickly correcting any issues that arise and avoiding errors that could damage your score.

6. Talk to your lender

If you run into problems and feel like you might struggle to make loan payments, it’s better to reach out to your lender sooner rather than later. Many lenders are happy to work with you to help you manage your debt and would prefer that to you suddenly missing payments and going into default.

Your lender might be able to help you by offering a deferment or forbearance, giving you more time to come up with the funds to make your payments. They could also work with you to consolidate debt, restructure debt, refinance it, or, in the worst case, settle for less than you owe.

What happens if you don’t pay an unsecured business loan?

If you don’t pay an unsecured business loan, there could be severe consequences. After a missed payment, your loan will enter delinquency. When this happens, the lender may assess late fees and other penalties.

If you miss payments for multiple months, your business loan goes into default. When this happens, the lender could immediately use the loan’s acceleration clause to demand full repayment. The lender could also bring legal action against your company to force payment, and if you signed a personal guarantee, your personal assets could be up for grabs.

Missed payments and loan defaults can also damage your credit, dropping your score and leaving negative marks that stay on your credit report for seven years. Bad credit can make future borrowing difficult, resulting in settling for bad credit business loans that are likely more expensive.

Bottom line

Unsecured business loans are an important tool for companies that need extra cash to cover their expenses or grow their business, but they’re a tool that comes with some risk. After you find the best unsecured business loan, use these principles to manage your loan properly and avoid unnecessary fees and interest charges.