Unsecured Short Term Small Business Loans: What Are They and How Do They Work?

Get answers to common questions about unsecured small business financing options.

  • Are you facing a business financial crisis?
  • Maybe you’re an entrepreneur who wants to take advantage of a once-in-a-lifetime business opportunity.
  • Perhaps you need business cash fast.

No matter the case, you may be considering an unsecured short-term business loan to get the financing you need.

It could be a good idea. Or it may not be. This article will answer the questions you have about unsecured small business short-term loans and help you determine if getting one is the right move for you.

  • What are unsecured short-term small business loans?
  • What types of short-term unsecured loans are there?
  • How do unsecured short-term business loans work?
  • Where can I get an unsecured business loan?
  • Is getting unsecured small business financing a smart thing to do?
  • What are the advantages of unsecured financing?
  • What are the disadvantages of unsecured business financing?
  • How can I find the right unsecured short-term small business loan option for me?

What are unsecured short-term small business loans?

Unsecured short-term business loans provide funding for immediate company needs. Small business owners often turn to them when dealing with a crisis or when they want to take advantage of an opportunity. They don’t have to put up collateral to secure funding. Unlike other small-business loan types, you won’t need to pledge real estate, equipment, or other business or personal assets to get a loan.

An unsecured business loan is issued and supported based entirely on the owner’s creditworthiness and not collateral. In most cases, the small business owner must have solid personal credit to get approved for financing. Business owners like them because they avoid the risk of putting valuable assets on the line — which could be lost — to be approved for funding. However, lenders may compensate for the increased level of risk by charging a higher interest rate and increasing penalties. The loans also have to be paid back fast.

Be aware: An unsecured small business loan is not backed by business assets or other collateral. However, some lenders will require a personal guarantee, which is a promise made by a person, usually the business owner, to accept responsibility for loan debt if a business defaults on it.

What types of short-term unsecured loans are there?

Types of unsecured small-business loans include:

Short term business loan

Term loans provide small businesses with a lump sum of capital, which is paid back over a set period with an agreed-upon payment schedule. The cash can be used for a range of business needs. Unsecured business loans are likely to have higher interest rates and shorter repayment terms than secured loans. A small business owner’s ability to qualify directly depends on their credit report and business revenue.

Short-term unsecured business bank loans may be available, but the fast payment schedule and high-interest rates can make them prohibitively expensive for many small businesses and startups.

Business line of credit

An unsecured business line of credit could be a good option if your company requires regular on-demand access to cash. It’s suitable for business owners who want access to funds when they need them, at a competitive interest rate, with reasonable repayment terms. A lender approves you for a revolving line of credit. You don’t use the funding until you need it, and you only pay back your credit line when you’ve accessed it. You can use a business line for working capital, filling in cash flow gaps, or growing your business.

To qualify for an unsecured business line of credit, you must have solid credit scores, a well-established personal credit history, and a significant amount of credit that you haven’t used. You also don’t want too many hard credit checks on your record over the last six months.

A business line of credit from a bank is not the same as getting a business credit card. It has a much more rigorous approval process. A line of credit also has lower interest rates and comes with no cash advance charges.

Tip: While this piece is about unsecured short-term credit options, if you or your business has assets such as real estate, equipment, or valuable inventory, you may be able to leverage them as collateral to get lower interest rates for your business funding.

Invoice financing

Invoice financing can serve as a working capital loan for small businesses experiencing cash flow issues resulting from unpaid invoices. Invoice financing allows you to sell your outstanding accounts receivable to a lender at a discount. The discount is relatively steep, typically about 20 percent of the value of the invoices. The lender then tries to secure payment in full from your customers and clients.

Be aware that while invoice financing is relatively easy to get, the costs are high, and the collections activity could harm relationships with your customers and clients, not to mention the reputation of your business.

Merchant cash advances

A merchant cash advance can provide you with fast access to cash. With it, you receive a lump-sum payment for a percentage of your future expected sales. You repay the advance, plus fees, with a portion of your future credit and debit card sales or fixed regular transfers (as often as daily or weekly) from your business bank account. Because they typically come with extremely high interest rates, merchant cash advances are usually not a sound choice for most small businesses.

How do unsecured short-term business loans work?

Unsecured business financing functions like regular small-business loans, except you aren’t required to put up things of value owned by the business or you personally as collateral. Not every borrower qualifies for non-secured financing, especially those with bad credit.

Some alternative lenders offer small-business loans that don’t need to be backed up by collateral. Instead, they provide unsecured loan financing based on the creditworthiness of you or your business.

Where can I get an unsecured business loan?

Traditional banks and lenders and credit unions sometimes offer unsecured term loans or business lines of credit. However, you’re more likely to get an unsecured small business loan from an online or alternative lender. These lenders are typically fintech companies that conduct business using automated technology and artificial intelligence to determine your creditworthiness. The application process includes uploading your business plan, balance sheets, and more. Most of your interactions with the lender will be online, although personal support is usually available over the phone. Online fintech lenders typically charge higher interest rates than traditional lenders.

Alternative and online lenders are much better options than using credit cards for short-term business financing because it’s easy to run up significant credit card debt because of their high interest rates. Another positive aspect of online lenders is that there is less red tape to work through than with traditional lenders. The application process is easy and fast, and if you qualify, you will receive your loan money in your business bank account in as little as one day. If you decide to get a business line of credit, the availability of cash will be almost as fast.

Is getting unsecured small business financing a smart thing to do?

These types of loans may be a reasonable — or the only — choice for small business owners that don’t have collateral or sound credit ratings. Unsecured small business loans are typically more expensive than traditional bank financing. They aren’t necessarily a bad option. Unsecured loans could still make sense if you want to take advantage of a once-in-a-lifetime opportunity or survive a crisis. Just run the numbers with your accountant or financial advisor to determine if unsecured financing could make sense for you.

What are the advantages of unsecured financing?

Here are some of the pluses of these types of loans:

  • Easy to obtain: Unsecured business loans are simpler to get than secured ones, and it’s typically faster to get cash if you qualify.
  • Quick approval: Unsecured financing comes with shorter approval times than secured loans. Some lenders approve them in as little as one day. Many secured types of financing, including Small Business Administration loans (SBA loans), can take as much as a month or more.
  • Few restrictions on use: Unsecured business loans typically don’t come with significant limits on using the money outside of financing for illegal activities, gambling, or purchasing securities.
  • Challenging to take personal or business property: A lender can seize collateral with a blanket lien if a business defaults on a secured loan. They must have a court order, often difficult to get, to take your business or personal property because of a default on an unsecured one.
  • Bankruptcy discharge: If your business files for bankruptcy, the court may discharge unsecured loans. Secured loans are typically not discharged.

What are the disadvantages of unsecured business financing?

Here are the negatives of unsecured short-term business financing:

  • Personal guarantees are required: With unsecured business financing, loan companies usually require personal guarantees. You typically don’t need to offer up a specific asset when you take out the loan. However, you are still personally responsible for paying the funds back if you make a personal guarantee.
  • High-interest rates: Unsecured business loans are risky, so interest rates on them are usually higher than on secured loans. Your company will likely pay more for interest over the life of an unsecured loan than a secured one.
  • Shorter repayment terms: Unsecured business loan repayment terms are typically shorter than those of secured business loans. They usually require more frequent payments (more often than once a month). Secured business financing typically allows for more flexible payment options.
  • Tough qualification requirements: Qualifying for unsecured business financing can be challenging. If you or your business have poor credit scores, you likely won’t be approved unless the lender is willing to consider future revenue when making a loan decision.

How can I find the right unsecured short-term small business loan option for me?

Here are some factors to consider to find the right loan for you from a good loan provider:

Eligibility requirements

Check basic eligibility requirements to figure out whether a lender is likely to approve your loan application:

  • Minimum credit score (both personal and business) requirements
  • Minimum time in business
  • Minimum annual revenue.

Don’t waste time and money applying for loans from lenders that won’t approve you in the end.

Unsecured loan options

Learn the specifics when searching for a loan and before you sign on the dotted line for any unsecured small business financing.

  • Loan types: Limit your search to lenders known for specializing in the kind of loan you want, whether a term loan, business line of credit, invoice financing, or a merchant cash advance.
  • Loan limits: Don’t compromise. Find a lender that will provide unsecured business financing in the loan amount you require. A too-small loan could force you to make payments on it while not solving your cash needs.
  • Term length: Unsecured loans typically have shorter repayment periods than secured ones. That means the monthly payments — or daily or weekly ones — could be very high. Make sure you can repay the financing before you secure it.
  • Cost: A loan that costs less over the term of it is usually better for your business and its cash flow. Carefully review all of the costs associated with it, including:
  • Interest rate
  • Down payment
  • Origination fee
  • Other fees.

You should always make sure you can trust your lender. Before you choose one, read reviews and check with the Better Business Bureau.

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