Unsecured Business Financing
Unsecured Business Loans are a type of financing that involves obtaining a small business loan with no collateral. While this isn’t necessarily common practice by many traditional commercial lenders (being that banks have a fiduciary duty to protect the bank’s finances) there are plenty of banks and alternative lending companies willing to provide financing based solely on the creditworthiness of the business, as well as the company’s cash flow position and ability to payback the new business debt. In short, to get a unsecured or no collateral business loan, a company must exhibit sufficient cash flow to show they can payback the debt. Unsecured business funding options include bank financing, alternative business lending, unsecured merchant cash advances, and unsecured ACH loans. Structure of the lending facilities can be structured as both unsecured term loans, unsecured lines of credit and no collateral business cash advance financing. In this article we will explore the no collateral business funding options and unsecured business lines of credit are best for your business.
What is Collateral?
Collateral is an asset owned by a business or business owner that is used to secure business funding. A lender may use the equity of collateral (or a percentage of the equity value) to provide a company a business loan. If the company should default on the loan, the lending company can then seize and sell the business collateral to recoup the lender’s losses.
Benefits of a Business Loan Without Collateral?
There are a number of benefits of unsecured business loans, including the fact the business doesn’t need to risk any of their own collateral or the collateral of the small business owner, nor does the business need collateral simply to get approved for funding. Now, just because a company may not need collateral to secure a loan, that doesn’t mean that the company will not be on the hook should the company default as, usually, a blanket lien is issued once the unsecured commercial loan is funded. If the loan isn’t paid-back, the lender will still be able to come after all business assets a company may have.
Drawbacks of a Business Loan With No Collateral?
Since unsecured business lenders don’t require a company pledge business collateral to secure this type of small business funding — and the the fact the lender faces increased risk of loss should the borrower default — an unsecured business loan will generally have higher rates and shorter terms than most traditional loans offered by large banks, small banks, community banks and credit unions.
Unsecured Business Lenders?
| Lenders | Offers Unsecured Loans |
|---|---|
| Bank | Rarely |
| SBA | No |
| Alternative | Yes |
| Cash Advance | Yes |
| Invoice Finance | Yes |
Unsecured Bank Loans
While some banks and traditional business lending institutions do offer unsecured term loans and lines of credit (in theory) very few banks would even consider funding a commercial loan without collateral unless a company have great a great credit score (over 700) and are able to show the company exhibits both good cash flow in the past, but also projects good cash flow in the near and mid future.
- Rates: 7-25%
- Terms: 1-5 years
- Fees: Low
- Funding Time: 30 days
Unsecured Alternative Loans
Mid prime alternative loans provide small business owners with the unsecured financing a business may need when they lack collateral to attain more traditional forms of financing. The application process with attaining a mid prime alternative business loan is much faster and simpler than the application process when applying for a traditional bank loan. Funding usually take less than a week, and upfront fees are minimal or nonexistent.
- Rates: 10-25%
- Terms: 1-5 years
- Fees: 1-5% origination
- Funding Time: 3-10 days
Unsecured Merchant Cash Advance
Unsecured merchant cash advances are not unsecured businessloans, but instead a business-to-business transaction that consists of the the sale of future business bank deposits in return for immediate cash. No collateral is required by the borrower, but the lender reduces their risk by requiring repayment be made daily through automatic deductions from a small business’ credit card transactions. The application process for a merchant cash advances is the quickest of all business financing types, with approvals usually within hours and funding within days.
- Factor Rates: 1.16-1.55
- Terms: 4-24 months
- Fees: 0-5% origination
- Funding Time: 1-3 days
Unsecured ACH Loans
ACH Loans (or business cash advances) are another way for a company to obtain fast funding without collateral, by selling the company’s future bank deposits in exchange for upfront funding of cash at a discount. A lender will evaluate a company’s bank deposits over the past 4-6 months, and then provide financing based on a percentage of total deposits in the company’s main operating bank account. After funding, repayments are made daily through ACH (automated clearinghouse) in which a set amount is withdrawn from the business bank account until the loan is paid back.
- Factor Rates: 1.16-1.55
- Terms: 4-24 months
- Funding Time: 1-3 days
Unsecured Invoice Financing
Using a company’s unpaid 30-90 day invoices is a great way for a company to obtain unsecured business capital without having to pledge any business collateral. To obtain unsecured invoice financing, the factoring company will purchase an invoice from a business at a discount. Usually the lender will forward up to 95% of the invoice’s value, and then provide the rest (minus a fee) once the factoring company is paid by the third party.
- Fees: 1-3%
- Funding Time: 1 day
