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What to know about unsecured business financing

On Behalf of | Oct 2, 2023 | Business Law

It is natural to worry about risking collateral to secure a loan for a commercial purchase or to finance an aspect of your company’s operations. This is why some entrepreneurs apply for unsecured loans. It is not easy to find approval for this kind of loan, but it is possible, especially if you have a good relationship with a bank.

An unsecured loan is funding that does not require putting up collateral and can originate from banks or even the Small Business Administration. In fact, the SBA allows for unsecured loans under $150,000 and even up to $350,000 in some circumstances. Still, like any form of financing, there are possible benefits and drawbacks.

The advantages of unsecured financing

Without the need to use your property as collateral, you can free it up for other uses that can generate profit. Also, unsecured business loans typically have a quicker turnaround than traditional loans and give you greater flexibility in how you use the funds.

In addition, making regular payments on your unsecured loan can help improve your business credit score. This should make it easier to apply for other business financing later on.

Problems with unsecured loans

Relatively high interest rates are a significant drawback of unsecured business loans. Lenders compensate for the lack of collateral by charging higher fees, which can significantly increase the overall cost of borrowing. A lender can also tack on additional fees, such as origination fees, processing fees, or prepayment penalties. These hidden costs may further strain your finances.

Furthermore, sometimes business owners who cannot repay the unsecured loan become personally liable for the debt. This can put your personal assets and credit at risk.

According to Forbes, traditional business loans have dropped from 43% in 2019 to 34% in 2021, showing that many entrepreneurs are exploring different ways to finance their operations. Still, relying on unsecured financing should include an examination of possible risks to avoid legal and financial complications.