Loans are the “lifeblood” of small businesses to sustain their needs for daily operations until their earning assets are adequate to cover their working capital budget. As the business thrives, their own assets and cash flow are earning money; they can start repaying bank loans. Most business owners prefer unsecured business loans since borrowers are not required to provide collateral requirements as a loan guarantee. Secured business loans required “secured” title as the collateral while unsecured loans do not require any property to secure financing.
Unsecured loans have two wide categories: namely (i) personal loans and (ii) business loans. The purpose of personal loans is to have funds to meet the personal financial needs of the individual while business loans are taken out by businessmen who need extra cash in fulfilling business objectives like expansion, setup, etc.
Fundamentals of unsecured business loans
Collateralized bank loans became a banking tenet of business lending after a series of business failures in the late 1980s and early 90s. Collateral can be the latest computer model or innovative manufacturing equipment, your real estate, expensive vehicles, or any valuable inventory, including your personal assets as your family home. If a business fails to make regular monthly payments on the loan, lenders can obtain a court order to seize that property from the borrower and liquidate it for repayment of the loan.
Although unsecured business loans do not require any collateral free they are difficult to obtain as lenders still want protection for their interests when lending out their funds.
Why unsecured business loans are better than other loan options?
- Funding is fast
Applications are not as lengthy and involved as other types of business loans. Some lenders of unsecured business loans only ask minimal of information to get the funds in your account.
- Your assets are not at risk
One of the best benefits of business funding using unsecured loan is that no personal or business assets of the borrower are at risk. However, in the worst case scenario, if you default on an unsecured business loan, you will not be losing your property as they are not put up as collateral.
- You can opt for a larger loan amounts
In some scenarios, you may be getting a larger loan amount with an unsecured business loan than you would with a secured loan. Why? Because unsecured business term loans have no collateral requirements to back them, you may be able to borrow more funds than would be possible if you offer collateral.
Common forms of unsecured loans
There are several types and each one comes with tradeoffs. Search for that kind of loan that meets your needs and minimizes costs.
- Signature loans
Signature loans are considered as the most basic type and only your signature and promise to pay serve as security. Find these loans in some banks and credit unions; use the loan amount for any purpose you desire.
- Credit Cards as loans
Many people borrow by using credit cards. Credit cards make a good option and a popular solution because once you’re approved; you can borrow money practically instantly; however, interest rates are high.
- Student loans
These unsecured loans are not for business. They are education funding for students.
- Peer-to-peer loans:
This newer type of funding allows you to borrow from individuals, as opposed to borrowing from a secured loan from a traditional lender such as a bank. Several websites allow you to post a loan request online, and people may step in and fund your loan. You can visit popular P2P lending sites, such as Prosper.com or look for a Lending Club.
- Personal loans
As personal loan is the most common type of unsecured loan, when you apply for a personal loan, there is no need to mention the reason for taking the loan.
- Payday loans
Payday loans are small term loans available to salaried individuals to be repaid when the loan applicant gets his or her next salary or wages. Interest rates and monthly payments charged for payday loans are quite high.
Top 3 unsecured business loan lenders
Most lenders demand a kind of personal guarantee in the repayment terms but you can consider looking at these lenders to provide technically small business loans without any collateral.
- Kabbage offers a business line of credit that can range from $2,000 all the way up to $150,000. Kabbage has the best line of credit for they provide your requirement for an unsecured business loan but they also offer small business loans fast access to capital. If you need fast funding for cash flow, Kabbage is a great option because they can fund your application within a matter of hours.
- On Deck Capital provides short-term unsecured business loans in the form of lines of credit although slightly harder to qualify for than Kabbage, but you’ll get better interest rates and repayment terms than you’d typically be able to access through unsecured business loans—PRs range from 13.99% to 36% on their line of credit product specifically.
- LendingClub offers both a business line of credit similar to business loans and medium-term loans similar to a bank. However, Lending Club has slightly higher APRs compared with banks, SBA offers to access to your funds on a much faster time frame.
Eligibility criteria for unsecured loans
- To qualify for a loan, the applicant should have a stable employment. Playing a key role in making borrower eligible for an unsecured loan is his/her regular employment record.
- Salaried individuals are required to have minimum 2 years of professional service or a self-employed person with a minimum of 5 years in the business of earning tenure
- Borrower’s age for employees with salaries must be above 21 years and not over 60 years for salaried borrowers and for self-employed individuals between 25 and 65 years.
- A crucial requirement in determining loan eligibility is to provide current financial statements during the loan application process.
- Credit history of the applicant is accounted for and it becomes instrumental in determining eligibility, interest rate, and amount of loan.
- Also considered are pending EMIs from other bank loans to determine loan amount eligibility.
Documentation required for taking an unsecured loan for salaried applicants
- Duly filled out loan application form
- A couple of passport-size photographs of loan borrower
- Proof of identity – driving license, passport, PAN card or voters ID (anyone proof)
- Residence proof – passport, any utility bill, etc.
- Proof of income – Salary slips for the last 3 or 6 months
Features of unsecured loans
An unsecured loan is a good option for the application process is generally easy and convenient and even available through online application.
Bank loans offer speedy turnaround time on processing an unsecured application for loans, sometimes even less than 24 hours, making this type a handy financial tool.
Although interest is usually higher compared to secured business loans, however, the interest rate on these loans also depends on the monthly or annual income of the loan applicant.
To access unsecured loans, the small business owner needs no collateral as security so assets are safe and secured.
The higher the income, greater the loan amount. It follows that applicants can access unsecured loans based on his or her income.
Unsecured business loans require minimum documentation and, therefore, small business owners have a hassle-free loan application process.
If your business needs more funds, you can always depend on unsecured business loans to see you through.