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If you want to grow your business, but you don't want to put your building, equipment, or your home on the line to do it, an unsecured loan may be a good option.
An unsecured loan is financing that doesn't require collateral. Instead, the lender approves you based on credit and how well your business is doing. You may still have to sign personal guarantees, but by keeping your assets out of the deal, you have more breathing room.
For years, I've been helping business owners secure alternative financing. Below, I'll cover how an unsecured loan works, what it really costs, and how to get financing quickly.
| Feature | Secured loan | Unsecured loan |
|---|---|---|
| Collateral | Yes. These loans are secured with your property, equipment, or other assets | No. The decision to lend money is made based on your financial history and income. You may still be required to submit a personal guarantee |
| Approval speed | Approval time for this type of loan can take from several days to several weeks | Same-day approval is possible |
| Interest rates | Low interest rates are possible because the lender is taking on less risk when lending against an asset. | High interest rates are required because the lender assumes all of the risk. |
| Typical use | Best for large purchases, such as purchasing real estate or financing a project that will happen over several years. | Made for working capital, funding cash flow gaps, or financing short-term business needs. |
| Amount of loan | Typically larger than unsecured loans | Typically, much smaller amounts |
| Sensitivity to credit history | Collateral can help support your application even if you've got bad credit | Your income and financial history are evaluated for your ability to repay the loan. |
Types of Unsecured Business Financing
Unsecured loans fall into a few different buckets. These are the most common types of unsecured loans small and midsized businesses reach for.
Term loans
A business term loan provides a lump-sum disbursement with a pre-determined repayment schedule. Typically, these loans are used for projects that have a known price tag and that will yield profits quickly.
Business lines of credit
Business lines of credit provide access to a revolving source of funds that can be drawn upon as needed. Only the borrowed portion bears interest.
SBA loans
SBA loans are backed by the U.S. Small Business Administration and allow lenders to extend longer repayment terms at competitive interest rates. Lenders can extend longer repayment terms and competitive interest rates.
Merchant cash advances
A merchant cash advance provides you with a single up-front lump sum of capital that you repay in proportion to your daily card sales.
Invoice factoring
With invoice factoring, you sell unpaid invoices to an invoice factoring company for immediate cash, and they take responsibility for collection.
Business credit cards
A business credit card works like a consumer credit card, but uses your company name as the account holder. After being issued a credit limit, you use it to make small purchases and receive a monthly billing statement.
Benefits of Unsecured Business Loans
SMBs tell me they prefer unsecured business loans because they're more flexible and leave their assets out of the deal. Below, I explain why some businesses prefer these types of loans.
You keep your assets
If you default, you won't have a lien placed on your asset. However, a personal guarantee may still be required.
You get funding as fast as same day
Unsecured loans typically require less paperwork because no appraisal is required. Through Clarify Capital, financing can happen as fast as same day.
You choose how to use the funds
In many cases, you're able to use the funds however you want. Some common uses I see include funding payroll, buying inventory, and covering the cost of marketing.
You build credit
Paying on time is good for your business credit scores, opening up access to lower interest rates in the future.
Minimum Qualifications
$10,000 in monthly revenue
Your business must earn at least $10K per month in a business bank account.
500+ credit score
You can get approved with any credit score. But the better your credit rating, the better interest rates lenders offer. Your FICO score should be above 500.
Minimum six months in business
Your company should be operational for a minimum of six months. This shows business lenders that your company is sustainable and won't go out of business.
Have a business bank account
Your Clarify advisor will need three or four months of your most recent bank statements to verify income. This is just to see you're actually making $10K+ month in revenue.
Cost of an Unsecured Business Loan
So what does an unsecured business loan cost? Below is an example showing what a $50,000 unsecured loan would cost.
Remember, unsecured business loans may cost more than secured business loans. This is because lenders are taking on additional risk without an asset to secure the loan.
Here's how the math shakes out.
| Loan amount | Interest rate | Repayment term | Monthly payment | Total interest |
|---|---|---|---|---|
| $50,000 | 6% | 24 months | $2,216 | $3,185 |
| $50,000 | 15% | 24 months | $2,424 | $8,184 |
| $50,000 | 25% | 24 months | $2,669 | $14,046 |
| $50,000 | 6% | 60 months | $967 | $7,998 |
| $50,000 | 15% | 60 months | $1,189 | $21,370 |
Common Misconceptions About Unsecured Business Loans
Several common misconceptions regarding unsecured business loans exist among small and midsized businesses. Here are the top three I hear.
Myth 1: You need perfect credit to get approved
Online lenders approve borrowers using cash flow metrics rather than relying solely on credit quality. Clarify Capital is one of them. I've helped many businesses with poor credit scores get financing because they were strong in other areas of their application.
Myth 2: You can expect high interest rates
While it is generally true that these loans have higher interest rates than secured loans, your rate largely depends on your creditworthiness and sales figures. Clarify Capital's rates start at 6% for some financing options.
Myth 3: You'll only be able to get a small loan
Lenders through Clarify Capital's network offer unsecured business funding up to $5 million.
When a Secured Loan Is a Better Option
In some cases, a secured loan makes more sense.
Let's say you've built up equity in your home and want the lowest rate you can get. In that case, a home equity line of credit (HELOC) might be a good option. A HELOC is a revolving line of credit backed by the equity in your home. It sets up a draw period, during which you can borrow against your home's value, then a repayment period, during which you repay the borrowed funds. But remember, because a HELOC is a secured loan, your house is on the line if you can't pay.
Equipment financing is another type of secured financing. The equipment you buy becomes collateral for the loan. So if you can't pay the loan back, the lender has the right to take the equipment.
Grow Your Business With Clarify Capital
An unsecured business loan allows you to finance growth without putting your assets at risk. When you're ready to find out how much your small business qualifies for, apply today.
Clarify Capital's online application takes just two minutes. Checking your options won't affect your credit score.
Unsecured Business Loans FAQ
Below, I've written out answers to the most common questions about unsecured business loans.
How Difficult Is It To Get a Business Loan Without Collateral?
The process is easier than you may think. As long as your business has consistent revenue and some operating history, there are a number of different options available to you.
Can a Business Get an Unsecured Business Loan?
Yes. In general, all established SMBs have access to at least one form of unsecured business financing. The type and size of the loan depend on your revenue, length of time in operation, and credit. Many lenders still require a personal guarantee.
Can I Get a Loan Using My EIN Number?
No. Virtually all reputable lenders check an individual's personal credit and require them to personally guarantee the loan. A taxpayer ID number by itself isn't enough to secure financing. Clarify Capital doesn't provide EIN-only loans.
What Is the Monthly Payment for a $50,000 Business Loan?
The monthly payment amount for a $50,000 loan varies depending on the APR associated with the loan and the term of the loan. If the APR is 6%, and the loan is paid back within two years, then the monthly payments would equal about $2,216. But if the same loan were extended to five years, the monthly payment would decrease to about $967.
Is My Information Safe When I Apply With Clarify Capital?
Yes. Clarify follows SOC 2 security principles to protect your data, and checking your options with us is a soft credit pull. Checking your options won't affect your credit score.
Bryan Gerson
Co-founder, Clarify
Bryan has personally arranged over $900 million in funding for businesses across trucking, restaurants, retail, construction, and healthcare. Since graduating from the University of Arizona in 2011, Bryan has spent his entire career in alternative finance, helping business owners secure capital when traditional banks turn them away. He specializes in bad credit funding, no doc lending, invoice factoring, and working capital solutions. More about the Clarify team →
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