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Unsecured Business Loans: How They Work, Rates, and How to Qualify For 2020

Unsecured business funding: at a glance

When it comes to acquiring a business loan from a traditional bank, many business owners find themselves in a sticky situation due to heavy requirements and long time frames to funding. Unsecured business funding was created to avoid these common issues with traditional business loans and make quick, small business loans possible.

How does an unsecured business loan work?

Unlike secured or traditional bank loans, unsecured business loans don’t require collateral or a personal guarantee . Approvals are based on your revenue and cash flow.

How to qualify for an unsecured business loan

Get your funding options with : Complete application 3 months of banks statements

bad credit – and all industries are accepted. Requirements: 6 months in business and $10,000 in monthly sales

What is an unsecured business loan good for?

Uses typically include :

  • Working Capital
  • New Hires
  • Expansion
  • Inventory
  • Payroll
  • And Much More!

Most banks will only approve you for a loan if your business is at least two years old and only if the loan is secured and you can show positive cash flow and profit on your tax return.

In other words, you have a positive debt service coverage ratio that can service the loan on paper.

Most business owners under 2 years in business show a loss. From our experience over 70% of business owners, less than 2 years don’t show a profit due to startup costs and investments.

This means that if the business owner fails to make a payment or goes into default, the bank can seize collateral such as business property, equipment, cash savings and deposits, and even personal assets.

In addition, your business needs to have great to excellent credit. You can see how this can be problematic for new businesses.

Many business owners have no collateral or low credit scores (often both) and look for no collateral business loans to finance their working capital needs. So, what do you do? That’s where unsecured business loans can be invaluable.

With no personal guarantees or collateral required as well as funding (and approval) in as little as 24 hours, an unsecured small business loan with Excel Capital can give your business the funds it needs to move forward in times of expansion– or stay afloat when your business is in need of cash.

Complete our online application and see how much you can be approved for: Apply Now

With that said, below, we’ll cover everything you need to know about unsecured business loans.

First, let’s jump into the different types of unsecured business loans so you know what your options are.

What are the different types of business loans?

Unsecured Business Loans

Receive a sum equal to a portion of credit card sales. Advance is repaid as a percentage or “split” of credit card sales.

Split Funding

Gives you the ability to draw down on capital as you desire, allowing you to reuse provided you repay your balance.

Unsecured Business Line of Credit

Designed to fill immediate, short-term needs or cash flow issues. Predetermined payment schedules and amounts

Term Loan

Lender purchases a set of future sales, sold by your, the business owner, at a discount.

Revenue-based Factoring

As you may already be aware, there are primarily two types of business loans which are as follows:

  • secured business loansSecured Business Loans
  • secured business loansUnsecured Business Loans

Today we will dig deeper into the different types of unsecured business funding options and help you choose the best small business loan program for you.

When deciding what type of business funding is the right choice for your particular situation you have to analyze your options deeper than just asking yourself “what do business loans cost”?

When you have already made up your mind about business funding and committed to the fact that acquiring working capital is necessary to take it to the next step for your business you have two broad options to think about unsecured business loans or secured business loans, which one is the right choice for you?

In general, it seems pretty obvious what the difference between a secured business loan and unsecured business loans is, right?

One asks for collateral and the other does not  while that logic seems to be correct at face it more value most business owners need to understand that there are a variety of options available in both categories of funding (not just loans) and that there are a variety of business assets you can leverage to avoid having to pledge physical collateral or a commit to a personal guarantee to raise capital for your business.  

We have decided to put together a quick guide exploring a variety of different unsecured no collateral business loans and other funding products. So you can determine what type of funding is the best choice for you.

We will aim to explain the differences between each type of products and what kind of security interest or guarantee they may have attached to it.

We have all heard about unsecured business funding as a business owner but what does that really mean “unsecured” and what types of unsecured small business loans are available?

First, we’ll start by telling you what it doesn’t mean: it doesn’t mean that if you decide to wake up one day and say “I don’t want to pay my funding back just because the sky is blue” you are free and clear of your credit obligations.

What this refers to, depending on the type of funding, is either a removal of a personal guarantee or a removal of personal and most business assets, in the case of the inability to repay. What this serves to do is create a veil between your personal or physical assets and the credit obligations you make in the business world.

All unsecured business loans use your receivables as collateral which means if you stop having receivables (or money that is collected from sales and services) than technically the security interest in your receivables is worthless since you have no more receivables. That is why the rate can be higher than secured loans.

Additionally, most of these options will not require a first position lien filing on anything related to the business meaning the funding received is the last to be collected in case of a bankruptcy or liquidation.

Split Funding (also known as a Merchant Cash Advance)

Split Funding

*Also referred to as Merchant Cash Advance

Best for: Business owners who accept credit cards

  • Loan amount: $5,000 – $500,000
  • Repayment terms: 3 – 18 months
  • Minimum credit score: No minimum
  • Additional minimum requirements: $100,000 annual revenue, 6 months in business
  • Speed: Approval in 24 hours, funding in 2 – 3 business days

When explaining a merchant cash advance we like to call it split funding because literally what it means is, we apply a split to your receivables until the funding is paid in full.

The specifics of the split or percentage held back of your Visa and Master Card and other credit card processing volume is based on the contract that is agreed upon prior to getting funded and is generally underwritten based on your credit card processing volume coupled with your gross monthly revenue deposited into your business bank account.

Many business owners at first are confused by this concept and what this means but we will aim to simplify the definition of a merchant cash advance and the mechanisms used to collect this type of funding product.

All merchant cash advances utilize your future credit card sales to calculate the repayment pace of the advance and there are 3 ways to provide this type of unsecured business funding.

1. Merchant Cash Advance A Direct Split with Your Credit Card Process Provider

This is the most seamless type of merchant cash advance. All this means is we utilize one of our friendly credit card processors (click here for a list) to divert the agreed-upon percentage to us and applied to the outstanding balance whilst you receive the remainder of the credit card processing sales directly in your existing bank account like you normally did before receiving the business funding.

This split happens every time you batch out your terminal and you receive no delay in deposits and you repay at the pace of your business. This requires your process allow us to place as split on your credit cards sales. The beauty of a direct split is that it gives a funding option to business owners who have a high amount of NSF’s (non-sufficient funds) or overdrafts or have a very volatile sales cycle.

2. Lockbox Funding

This method is utilized when a business does not use one of our friendly credit processors and does not want to switch their existing merchant processing provider to facilitate the funding.

A lockbox is good because many merchant processors have early termination fee’s and this avoids paying them to get split funding. How a lockbox works is a bit more complex than a direct split on your credit card processor. We set up a lockbox account also known as a bridge account or you. This bridge account is an actual bank account where you receive online login credentials and a bank letter.

This account is solely used for splitting your credit batches between the funding institution and your business account. Once a batch is received into that account it is designed to automatically ACH the specified percentage to the corresponding accounts.

Due to the process associated with this type of funding, there is typically a 24–48-hour delay in the time it takes the money from your batch to hit your business bank account.

In order to set up a lockbox you need to follow these 3 steps:

  • Sign the lockbox form provided on the funding agreement authorizing the lockbox account
  • Receive the bank letter created upon receipt of the lockbox form.
  • Call your credit card provider and tell them you want to switch where your credit card processing activity is being deposited.

Usually, they can do this over the phone, online or will ask you to complete and sign a bank change form and have it return to them via email or fax which will require you to attach the copy of the bank letter to the executed bank change form.

This can take up to 48 hours depending on your credit card processor.

3. Variable ACH

These cases are perfectly simple and easy to distinguish. In a free hour, when our power of choice is untrammeled and when nothing prevents our being able to do what we like best, every pleasure is to be welcomed and every pain avoided. But in certain circumstances and owing to the claims of duty or the obligations of business it will frequently occur that pleasures have to be repudiated and annoyances accepted.

This mechanism is used to collect payments when a business owner does not work with a “friendly” merchant processor and does not want to incur the 24–48-hour delay in deposits. The way this works is pretty straightforward.

Our collections department logs into your merchant processing portal on a daily basis to see what the last batch was and then collects the specified percentage via ACH from the business bank account. This type of split funding requires access to your merchant processing online account at all times or else it would constitute a default.  

When a deal is in underwriting it will be determined if this option is available based on a formula that is heavily weighted on the average ledger balance in the bank account. Unlike direct split, if a business has many overdrafts in the account they will be declined for a variable ach but can still get approved for a direct split or lockbox method.

What’s Needed to Qualify for Split Funding?

  • You must accept credit cards with a minimum of $5,000 per month in credit card sales.
  • You must be in business for at least 3 months
  • You must be a US citizen or have Visa

What Paperwork is Needed to Qualify for Revenue Based Factoring?

  • A signed and complete application
  • Four months of recent business credit card processing statements
  • Four months of recent bank statements

All Varieties of Split funding are derivatives of unsecured business loans since they are not technically loans and advances of future sales at a discount.

Revenue Based Factoring

Revenue-based Factoring

Best for: Businesses that don’t accept credit cards

  • Loan amount: Up to 90% of invoice (invoice factoring)
  • Repayment terms: 3 – 24 months
  • Minimum credit score: No minimum
  • Additional minimum requirements: $100,000 annual revenue, 3 months in business
  • Speed: Approval in 24 – 48 hours, funding in up to 1 week

This type of funding was created through the need for unsecured loans and other funding products for businesses that do not accept credit cards.

Prior to 2008, there was no solution to this problem and all unsecured products (other than split funding) were based on credit card sales. Due to the high funding demands for businesses that don’t accept credit cards, revenue-based factoring was created and ACH loans were born.

The way this type of funding is structured is more based on overall revenue or cash flow. According to the contracts most institutions purchase a set percentage of all your future sales which you as a business owner then sell at a discount.

This percentage of future sales is then estimated over the course of an anticipated term, generally three to 24 months. This future revenue is then collected in a variety of payment options generally on a daily, weekly, bi-weekly or even monthly repayments.

In most instances, it will be daily or weekly and for better-qualified clients, it will be bi-weekly or Monthly. Within the language of the contracts, you have the right to adjust the payments based on your revenue. So if you have a drop in revenue you are allowed to reduce the payment obligations.

This type of funding is usually approved in 24 hours and can fund same day if the stipulations (see the list of items that may be needed) are met. According to the contract, it follows the same rule of thumb as split funding or a merchant cash advance.

A lien may be placed against your future receivables but most institutions do not require any personal guarantee or collateral and are considered unsecured business loans.

Revenue-based factoring will usually subordinate behind any other pre-existing funding you may have and will usually be the last creditor to collect in the case of a bankruptcy or liquidation.

What’s Needed to Qualify for Revenue Based Factoring?

  • You must accept credit cards with a minimum of $5,000 per month in credit card sales.
  • You must be in business for at least 3 months
  • You must be a US citizen or have Visa
  • A signed and complete application
  • Four months of recent business credit card processing statements
  • Four months of recent bank statements

What Paperwork is Needed to Qualify for Revenue Based Factoring?

  • A signed and complete application
  • Four months of recent business credit card processing statements
  • Four months of recent bank statements
  • Financial statements may be required from time to time.

Unsecured Business Line of Credit

Business Line of Credit

Best for: Cash flow

  • Loan amount: $2,500 – $250,000
  • Repayment terms: 6 – 12 months revolving
  • Minimum credit score: 550+
  • Additional minimum requirements: $50,000 annual revenue, 1 year in business
  • Speed: Approval in 30 minutes, funds instantly

These lines of credit revolve based on your outstanding invoices and receivables. Unsecured business lines of credit are not technically unsecured business loans but a line of credit which were designed knowing that many merchants want to have the ability to prepay and draw down on capital as they desire instead of being obliged to take a full funding amount and have to repay it based on the receivables.

The way these products work is, they take into consideration what invoices and receivables a business has outstanding along with the cash flow and revenue to determine a sustainable business line of credit.

The process is relatively straightforward with approvals being issued in about 48 hours. In order to see if your company is eligible for an unsecured line of credit, you have to submit the same application and bank statements as listed with spilt funding and revenue base factoring, but you also must meet the criteria below.

What’s Needed To Qualify for Unsecured Lines of Credit?

  • You must have a business bank account
  • You must be a US citizen
  • Generally, you must maintain an average ledger balance of $1,000 in your business bank account
  • 50k + in Yearly Revenue
  • 1+ years in business
  • Can not be a non profit
  • 540+ FICO
  • Can not have more than 3 Negative days a month in your bank account

What Paperwork is Needed to Qualify for Revenue Based Factoring?

  • A signed and complete application
  • Six months of recent business credit card processing statements (if you accept them at your business)
  • Six months of recent bank statements
  • Financial statements may be required from time to time.

Short Term Loans

Term Loan

Best for: Those who need a quick infusion of cash

  • Loan amount: Funding over $75,000 may require additional documentation
  • Repayment terms: 2 -5 years
  • Minimum credit score: 680+
  • Additional minimum requirements: $500,000 annual revenue, 2 years in business
  • Speed: Approval in 24 – 48 hours, funding in > 72 hours

These types of unsecured small business loans are created to help business owners fill immediate, short-term needs or cash flow issues. This type of funding is structured as a loan with predetermined payment schedules and amounts. With this type of funding its very important to review the contract as the language varies from institution to institution.

Many bigger lenders may require a personal guarantee that can include assets. While some other lenders may include a limited personal guarantee that allows the lending institution to go after personal assets in cases where fraud is committed.

In many cases, it is very hard to prove fraud but in a business where the service is money the lenders use this language as a way to protect themselves against potential fraud.

What’s Needed to Qualify for a Short Term Business Loan?

  • Completed Application
  • 4 months of most recent bank statements
  • 4 months of most recent processing statements
  • Minimum of 2 months in business
  • Minimum of $7,500 in monthly revenue
  • Funding over $75,000 may require additional documentation

What Paperwork is Needed to Qualify for a Short Term Business Loan?

  • Most recent business tax return
  • P&L
  • Balance Sheet

This type of loan doesn’t require a lot of paperwork, funds quickly, and can be used for almost any business purpose. Short-term loans are perfect for purchasing inventory, filling gaps between accounts payable and receivable, as well as any emergency repair or maintenance expenses that may pop up. These loan products generally have repayment terms of 3 to 24 months.

As the alternative lending space is developing and expanding new unsecured business loans are constantly being created. This does not encompass all unsecured business finance products but covers a majority of what we see being utilized by small business owners.

Having said that, below, we’ll cover how unsecured business loans work, why they’re useful, rates and terms, as well as how to get approved for a fast business loan in as little as 24-48 hours:

How an unsecured business loan works

What is an unsecured business loan good for?

Unsecured business loan rates and payment terms

How to qualify for an unsecured business loan

How do unsecured business loans work?

What is the difference between secured and unsecured business loans

Secured business loans

  • Requires collateral
  • Lower rates
  • 680+ credit score
  • 2+ years in business
  • Positive profit & loss tax returns
  • Up to 90 days to get funded
  • Reported to credit bureau and affect utilization

Unsecured Business Loans

  • No collateral required
  • Higher rates
  • Credit score not heavily weighted
  • 6+ months in business
  • Financials not required
  • 24-hour funding
  • Does not affect or report your credit

Unsecured business loan amounts typically range anywhere from $10,000 to $2,000,000 depending on the cash flow of the business being underwritten.

They don’t require you to put down any form of collateral. Hence, making them unsecured for the lender. However, you still need to meet certain basic requirements.

The amount of the loan is dependent upon your:

  • Business’ credit score
  • Average monthly bank balance, and
  • Annual revenue

Unsecured business loans will typically range between 75% to 150% of your last 3 months average gross monthly sales. That means if you deposited $100,000.00 on average for the past 3 months, your business can qualify for $75,000.00 to $150,000.00. Terms typically range between 6 and 18 months.

Keep in mind that if a cash amount is not approved, you as a business owner may instead be offered a line of (unsecured) credit.

In addition, while secured business loans require collateral, such as your house, car, 401k, inventory or account receivables, unsecured loans only require you to pledge limited collateral such as your future sales that only apply to your business.

In fact, funding contracts explicitly state that if you stop having receivables and you go out of business, you’re not entitled to pay back the business loan.

This is one of the primary benefits of an unsecured small business loan. If your business hits a rough patch and you has trouble making payments, or default on the loan, there’s no collateral to lose.

In fact, we’ve found this process to be largely ineffective for ourselves as a lender as well.

It’s our goal to work with you, not against you. So, if you do struggle to make loan payments, we’ll help find you a solution to correct the problem, improve your working capital, and get current once again.

Unsecured business loans: Pros and cons

So far, we’ve touched on some of the benefits of unsecured business loans. Now, let’s cover both the pros and cons of this powerful financing vehicle. 

There is no perfect type of loan for all businesses, and as we discussed earlier there are several different types of unsecured business loans. However, there are some overarching qualities to all unsecured business loans, pros and cons, that you should be aware of. 

Here are the pros and cons of unsecured business loans. 

Pro: Funding is fast and simple

The approval process for traditional bank loans is notoriously long and difficult. When all is said and done, it can take well over a month from start of application to finally get an approval, and longer still to get funded. 

With unsecured business loans, the process is quite the opposite. Assuming your documents are all in order, you can not only be approved within 24 hours, you can also receive the funds in your bank account within another 24 hours. 

That’s a total of 48 hours, lightning-fast compared to the traditional bank lending process. 

Pro: Loan amounts are large

Secured business loans amounts are typically tied to the collateral you use to secure the loan. That means you’ll rarely receive a loan for greater than the value of the asset. 

With unsecured business loans, that’s not necessarily the case. You can be approved for much more than you would have been approved for with a traditional bank loan in some cases. 

Pro: No hard collateral

One of the greatest benefits of unsecured business loans is the fact that they don’t require the kind of hard collateral that traditional bank loans require.

It’s important to keep in mind that a kind of soft collateral may still be required, typically in the form of a promise of future business earnings in the case that you default on your loan. 

However, you’re not required to pay this back in the case that you go out of business, so it doesn’t function the same way that hard asset-based collateral does. 

Con: Higher interest rates

There are several pros to unsecured business loans, and they can be used for virtually any business purpose. However, like all business funding vehicles, they have their downsides as well.

With unsecured business loans, that really comes down to their higher interest rates.

Lenders need some sort of way to ensure they can get their loan back. To that end, they use things like collateral, personal guarantees, and interest. 

Because unsecured business loans don’t have collateral, lenders need another way to make sure they can at least make their loan amount back.

What can you use an unsecured business loan for?

An unsecured business loan can be used for virtually anything you can think of but most use it for working capital.

When business is up, you can use it to:

  • Purchase supplies
  • New equipment
  • Make new hires
  • Add another location
  • And much more

And when business is down:

  • Pump cash into the business
  • Pay accounts payable
  • Pay taxes or other obligations
  • Increase marketing
  • And payroll

Once you obtain an unsecured business loan, it’s completely up to you to determine how you spend the capital to grow or maintain your business.

It’s best to put the capital to work in ways that will help you increase sales and profits, therefore using the capital to create more cash flow over time. However, ultimately, you’ll be the best judge of how to do that with your business.

Unsecured business loan rates and payment terms

Unsecured business loans rates are distinctly different when compared to traditional bank loans.

Clearly, the lack of a personal guarantee or collateral is a huge upside, however, as you might imagine, this upside comes with some downsides.

The unsecured business loan rates and terms can be up to 18 months with payments being due either monthly, weekly, or daily depending on the loan terms.

In addition, unsecured business loan rates vary depending on risk. They can be as low as 14% on unsecured business loans but they can also go much higher as well. A big upside to this, however, is that we can get you approved even if you have a bad credit score and have delinquent or even maxed out tradelines.

How to qualify for an unsecured business loan

Requiring both 2 years of business history and a stellar credit rating, traditional bank loans are out of reach for many business owners.

However, if you find yourself in that boat, an unsecured business loan may just be the perfect solution to your funding needs.

According to the Mission Asset Fund, business loans are declined most often due to “having no credit history or a low credit score.”

Despite this, banks still prioritize credit scores and use an outdated credit-first model for approving (or denying) you for a business loan of any kind.

Rather than dwelling on factors that truthfully have little to do with the state of your business now, we like to focus on the present by looking at the business’ current conditions.

With Excel Capital, there’s no minimum credit score required to qualify for one of our unsecured loans.

When determining if your business is right for an unsecured business loan, our underwriters analyze a variety of metrics such as big data, historical risk models, and trade line distribution to determine its unique growth potential instead of just looking at your credit score.

Having said that, before we can qualify you for a loan, there are 2 qualifications that you must meet:

  1. Records showing at least $10,000 of monthly gross revenue
  2. Proof that you’ve been in business for at least six months

Do banks provide unsecured business loans?

Banks do provide unsecured business loans, however, it’s rare to find one and the requirements are extremely rigid.

Banks want to get their money back first and foremost and aren’t much interested in serving you as a customer, so they’re looking for highly profitable companies that have been in business for a long time.

For that reason, using a traditional bank to get a business loan comes with a variety of strings attached.

For starters, in many cases, you have to pay an upfront application fee just for the banks to process your application. To make matters worse, you usually won’t get your money back even if your application is denied.

A second problem with relying on a bank to provide your unsecured business loan is time. Due to a plethora of banking regulations, regulations that an alternative lender like ourselves doesn’t have to withhold to, banks send you through a large amount of red tape to determine whether or not they will provide you with a small business loan.

All this taken into account, it can take months until you get your money and only if they approve you.

How can I get an unsecured business loan?

A whopping 82 percent of small businesses fail from running out of cash. Is your business in danger of running out of cash flow?

Until recently with the introduction of unsecured business finance, obtaining unsecured business loans was a long, cumbersome process that required trails of paperwork and inconvenienced your day-to-day business operations.

So, we decided to fix that by creating an expedited process to allow small business owners to get through the application process as quickly as possible so you can get back to focusing on what matters– your business.

With Excel Capital, getting the cash your business needs to maintain growth– or simply get through a rough season– has never been easier.

You’ll get an approval decision from us in less than 24 hours and, pending approval, funds will be deposited within your account in as early as 24 hours as well.

Imagine what a surge of cash could do for your business, from providing the funds you need to purchase much-needed equipment to paying off past-due vendors, and virtually anything else in between.

Complete our online application and see how much you can be approved for: Apply Now

Frequently Asked Questions (FAQ)

What happens if you default on an unsecured business loan?

If you default on your loan, a late payment fee may be charged and your interest rate may increase, depending on your agreement. 

However, with no hard collateral requirements, your property and other hard assets such as vehicles or cash savings can’t be taken. That’s one of the major benefits of an unsecured business loan. 

Alternatively, with a traditional bank loan, collateral such as business property is required to secure the loan. That means if you default on your loan the property can be seized to collect on the defaulted debt. 

What is the interest rate on an unsecured business loan?

With no collateral requirements on unsecured business loans, interest rates tend to be higher compared to traditional bank loans. 

Unsecured business loans can go as low as 14% but can be higher, all depending the level of risk factors involved, with terms up to 18 months. 

Can I get a business loan without a personal guarantee?

Yes, you can obtain an unsecured business loan without a personal guarantee. It all depends on your agreement. Depending on your terms, a personal guarantee may or may not be required. 

Can I qualify for a business loan?

Anyone can be approved for an unsecured business loan provided their business is in good standing and they meet the basic credit requirements (500+ score). 

With Excel, you can be approved for an unsecured business loan even with bad credit, as we take a more balanced approach to determining your eligibility for funding by reviewing your entire business’ health. 

What credit score is needed for an unsecured business loan?

Traditional bank loans require very high credit requirements (680+) and have a long and tiresome approval process. 

However, just a 500 minimum credit score is required for our unsecured business loans, making them far easier to be approved for than a traditional loan.