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What are Unsecured Business Loans

Are you a small business owner in need of cash? Have you been comparing business loans, but are unsure which option is right for you? You’ve come to the right place.

It’s true that not all business loans are created equal. Let’s go over the differences between a traditional loan and an unsecured loan. Find out if an unsecured business loan is right for your business, or if an alternative loan option is better suited to your needs.

What is an Unsecured Loan?

A traditional business loan is a secured business loan. This means that it is secured by some kind of collateral in your business. An unsecured business loan, on the other hand, does not require you to put up any kind of collateral to get funding. Keep in mind there are still basic income and credit requirements, which can end up being quite high. This loan type will be heavily based on your credit history because an unsecured business loan does not require collateral. On the other hand, it is a reasonable way to get extra cash without risking your personal assets.

Pros and Cons of Unsecured Loans

There are several benefits to securing an unsecured business loan, which make it a reasonable option for some small business owners. These benefits include:

  • Higher loan amounts. You can actually get more capital from an unsecured loan if your credit history is good. This is because lending amounts for secured loans are heavily based on the state of your credit score.
  • Greater flexibility. You gain financial flexibility from the capital an unsecured loan provides. You can then cover payroll, expand your operations and cover other day-to-day costs.
  • Strong lender relationship. If you consistently work with the same lender, your business can benefit from building a relationship with them. It might even help you get better terms for future loans.

Unlike securing a merchant cash advance (which is not a loan, but a sale of future credit card sales), there are some disadvantages to using an unsecured business loan.

  • Limited flexibility in repayment. In most cases, you are not permitted to repay your loan early to save interest without steep repayment penalties. In addition, if you ever pay late, you risk the lender immediately writing you off and sending you to collections.
  • Steller credit history is a must. As mentioned, approval is based on your credit situation. So, if you do not have a sub-prime score (600 or below), you will probably be unable to get an unsecured business loan.
  • Potential damage to reputation. If you find yourself in a situation where you cannot repay the loan, it will damage your business’ reputation. This will make it much harder to get a loan in the future.
  • Unsecured loans are expensive. An unsecured loan means the bank has no collateral to seize if you fail to pay, making it a riskier loan option for them to offer. This means there will be a steeper cost for you (higher APRs, service fees and other associated costs).

Hopefully this information has helped you decide whether or not an unsecured loan is right for you. Are you worried about your credit score and potential risks? Do you need cash faster than an unsecured loan provides? Contact our team at First American Merchant for more information on our merchant cash advance. You can have your cash in as little as 24 hours, no collateral required. Bad or no credit history will not prevent you from securing the funds you need.