Alternatives to unsecured business loans

An unsecured business loan is any loan that doesn’t require collateral. These loans can be faster than secured business loans because you don’t have to wait to appraise an asset.

Some unsecured small business loans are harder to get than secured loans since a lender takes on more risk with this type of loan. These loans also tend to have higher interest rates to help account for that risk.  Before deciding on an unsecured business loan, check out these alternatives to unsecured business loans to see if one fits your business better.

Secured business loans

A secured business loan requires you to provide personal or business collateral, which is one or more assets you own that help secure the loan. Types of collateral include real estate, vehicles, business equipment, inventory and invoices.

If you are unable to pay off your secured loan, the lender has a legal claim to your assets and can seize them and sell them to recover the funds it loaned to you.

Lenders may also require a personal guarantee — a legal promise making business owners personally responsible for their business debt. If you stop making payments, lenders can take you to court and try to seize your personal assets.

While it seems that you’re risking your assets with a secured loan, these loans pose less risk to the lender. In return, the lender may offer lower interest rates and fees and longer repayment terms than unsecured loans, helping you in the long run. Below are the main types of secured loans and alternative funding options.

Secured term loans

Secured term loans provide a lump sum of cash you repay with interest over time. This flexible type of loan works best for large purchases or investments where you know the costs.

Secured loan interest rates can be lower than other business loan types, and repayment terms can be seven years or longer. Plus, if you have bad credit, online lenders will work with you, but the rates and repayment terms are less favorable. Be aware that bad credit business loans may require you to make weekly payments and may only give you anywhere from 12 to 24 months to pay back the loan.

SBA loans

SBA loans are administered by lenders but backed by the U.S. Small Business Administration. This type of loan is designed to help small businesses that can’t qualify with conventional business loans. A perk is that the SBA does not require collateral for SBA loans of $50,000 or less. But lenders can set their own terms and may still require collateral to minimize risk to themselves.

Most SBA loans over $50,000 require some form of collateral based on the lender’s non-SBA-guaranteed commercial loan policies. Examples of SBA collateral include real estate, inventory and equipment. SBA loans can also take 30 to 90 days to process, so you’ll need to be patient if you choose to apply for this loan.

Secured lines of credit

Business lines of credit are revolving forms of financing, similar to a business credit card. You can spend up to your credit limit and only get charged interest on the amount you use. Then, as you repay the loan, the credit limit replenishes, allowing you to use the available credit again in the future.

Lines of credit provide businesses with accessible capital for everyday business expenses. Lines of credit usually come unsecured, but you can find secured options with some lenders like Bank of America. Secured lines of credit may require you to back the line with collateral or cash up to the credit limit. Because the loan is secured and poses a lower risk to the lender, business owners with bad credit can qualify with some lenders.

On the other hand, secured business lines of credit may have much lower credit limits than unsecured business loans or lines of credit. For example, some banks might limit a secured line of credit to $50,000.

Equipment loans

An equipment loan is a type of secured term loan in which the equipment being financed serves as collateral for the loan. Since the lender can seize the equipment in the event of default, this arrangement provides security for the lender while potentially offering more favorable terms for the borrower. Unlike other business loans, you will need to use the loan solely for buying new or used equipment.

Invoice financing

Invoice financing is where you borrow against your accounts receivable or invoices that have not been paid yet. The invoices themselves act as collateral in this loan type.

One of the main benefits of invoice financing is that it gets you fast cash if you can’t wait for a client to pay an invoice. But you will pay high fees to the financing company once the invoice gets paid, dipping into your profit from the accounts receivable. This option works best if you have a short-term need to cover cash flow gaps in your business.

Business grants

A business grant is a type of funding awarded to qualified businesses that you don’t have to pay back. There are typically no collateral requirements. Businesses, nonprofits and government agencies may offer grants throughout the year. Many tailor products to help underserved communities.

That said, grants are highly competitive among businesses since grants are essentially free money. You’ll also need to meet all the qualifications before applying, which may include specifics about your industry or where you’re located. For more information, check out the following guides:

• Business grants for veterans
• Business grants for minorities
• Business grants for women
• Business grants for Black women
• Business grants for felons
• Business grants for the LGBTQ community
• Business grants for Indigenous people

Crowdfunding

Crowdfunding lets you raise capital in small amounts by seeking funds from large groups of people. You generate buzz around your business idea or product, and people elect to give money to your business idea. Crowdfunding often takes the form of donations and is usually performed through digital platforms.

Other types of crowdfunding, like equity funding, allow backers to get company shares in exchange for an investment. You may also consider giving rewards to investors, such as the product your business creates or giveaways.

The main drawback is that you’re not guaranteed to get the full amount you need or any funds at all. It can also take a long time to reach your goals, which may mean you can’t access the money until you reach it.

Peer-to-peer (P2P) lending

Peer-to-peer lending is a fairly informal type of lending, so it does not typically have collateral. Similar to crowdfunding, it raises the money for the business loan through a group of individual investors. You then pay back the loan with interest over a set period of time.

This option allows you to bypass getting funding from traditional banks, making it accessible to startups and bad credit borrowers. But rates and fees can vary, so it may not be the most affordable option depending on your creditworthiness and the platform you use.

Bottom line

Unsecured loans are just one way to finance your small business. There are also a variety of unsecured business loan alternatives, including term loans, SBA loans, invoice financing and crowdfunding. Make sure to consider each one carefully to choose the option that best suits your funding goals. Finding the best small business loan is essential to your success as your business grows.

Frequently asked questions

• What is the difference between collateral and personal guarantee?

  Collateral and personal guarantees are ways to keep you accountable for paying back the loan. Collateral is an asset you offer up that a lender can claim if you don’t pay back the loan. So, if you used a piece of farm machinery as collateral, the lender would take that equipment as payment for the loan if you default. A personal guarantee is a legal promise that you will make good on the loan if you default on payments, even if it means having your personal assets seized.

• Do business loans require a personal guarantee?

  Yes, many business loans require you to sign a personal guarantee. This is a way for the lender to ensure they won’t come away empty-handed if a borrower defaults on a loan. But you may be able to avoid a personal guarantee if you have sufficient collateral, such as real estate, inventory, machinery or other business assets.
  

• What collateral is required for a business loan?

  Common types of collateral can include real estate, business equipment, inventory or investments such as stock or bonds. Some lenders will allow cash. Invoices commonly become collateral for invoice financing. You may also see a blanket lien option, which allows the lender to seize any business assets it needs to repay the loan.