Best Unsecured Business Loans

Small businesses constitute over 98% of the US economy and employ more than 60 million people, (47.1 percent of the country’s labor). (Sources: JP Morgan, Small Business Statistics) Acquiring the best unsecured business loans helps keep the economic gears turning.

SMEs (small and mid-size enterprises) faced financing challenges even before the COVID-19 pandemic hit the country. However, the outbreak and the closure disrupted operations on all levels. The resulting drastic drop in demand forced the sector to close down- for many, permanently. Entrepreneurs who were able to reopen are now looking for ways to finance recovery. A significant portion of these businesses has little to no financing power. Also, no option for providing collateral to easily access conventional loans. Not to mention the widespread phenomenon of poor creditworthiness, which also affects SMEs’ chances.

Unsecured business loans, like merchant cash advances, fixed cost loans, lines of credit, and invoice factoring, can be a quick and effective solution for businesses. They help whether just beginning development or looking for a bridge option to survive until sales begin to grow again.

Pre- and post-COVID financing issues

Even before COVID-19, small businesses were struggling with financing difficulties. Unpaid invoices, late payments, and the need to discount due to continued fierce competition are just a few of the factors that could have halted a company’s progress at any time before the pandemic.

The sector became seriously undercapitalized, with businesses fighting for survival due to multiple reasons, including their location not being in the most favored states or regions (eg. New York, California), and business owners being under-informed about their options.

Pandemic-related quarantine closures have torn holes in the global economy not seen since the world wars. Small businesses, which are the most vulnerable, have been hit the hardest.

The following factors disrupt normal SME operation:

• sole entrepreneurs or key employees get sick
• demand decreases due to people being homebound
• businesses cannot offer their products or services due to regulatory closures
• potential buyers allocate their budget elsewhere
• there is a significant lack of important ingredients and assembly parts

According to a recent McKinsey study, many sectors, of which small businesses make up a large share, are only expected to reach their pre-pandemic performance levels of 2019 in 2025 or beyond. (Source: McKinsey)

Due to the above factors, the only viable option for many entrepreneurs is to opt-in for small business financing solutions. Which option should they prefer, secured or unsecured loans?

Secured versus unsecured small business loans

What is the difference between the two loan types?

Secured small business loans are backed up by specific collateral and assets, so the interest rates and terms are likely to be more favorable for a borrower, yet many small businesses are not eligible due to the high opt-in barriers.

When it comes to unsecured small business loans entrepreneurs do not need to provide collaterals, which makes these unsecured loan types more accessible. Even though unsecured business loans hold more risk to the lender financial institute, the price is not necessarily higher compared to the secured loans.

What are the best scenarios to take out an unsecured small business loan?

There are multiple scenarios, in which unsecured business finance options are the best fit, including:

• Your company needs financial help quickly, for example, when a development opportunity arises that can only be had inexpensively for a short period.
• Your company needs assistance because the loss of some of your employees has forced you to use subcontractors who request payment in advance – but you do not have the financial resources to do so.
• You have lost some of your seasonal revenue (e.g., due to the pandemic) and need to make up for it to keep your business running, i.e., to pay your expenses such as wages or rent.
• Any case where you are unable to raise collateral.
• If you or your business has a poor credit rating.

Can I take out unsecured small business loans with a bad credit rating?

The National Small Business Association surveyed 27% of businesses and found that they were unable to obtain the funding they needed. Their study found that 20% of small business loans are denied because of bad business credit. (Source: National Small Business Association)

What is a credit score or rating?

Like a personal credit score, a business credit score is based on several factors. Essentially, it is a grade based on your business’s past credit experiences. It usually ranges from 0-100. Credit scoring agencies usually look at:

• How you pay your debts and how much you owe
• Categorization of industries
• Documents available for public inspection
• Filings with the courts
• The size of the company and its background
• In the same industry, how does the company compare to its competitors

Unlike secured loans, you can apply for unsecured loans at any time, even if your credit rating is not healthy. However, you should be aware that a lower rating will be associated with higher costs and fees.

You can check out what to expect when applying for an online small business loan in one of our previous blog posts.

Best unsecured loans – Merchant cash advance

What is a merchant cash advance?

A cash advance for merchants is among the best and most flexible ways for small businesses to get financial support. A cash advances financing means that the borrower receives their income in advance, which they repay through a percentage of the future sales, or in regular (daily, weekly, or monthly) fixed installments.

It is possible to access merchant cash advances easier than other forms of business financing because the loan is secured by an expected, planned income. In addition to simple administration and fast processing, its highly flexible application makes it one of the best unsecured small business loans. Business owners with no or little assets or whose credit is limited should consider a merchant cash advance as a funding solution. (Source: Investopedia)

How does a merchant cash advance work?

The lender reviews the bank statements as well as credit card statements – if they’re available. While the cost of some programs is split through the merchant’s payment processor, most of the merchant cash advances are simply paid back in daily, weekly, or monthly fixed installments.

This unsecured business finance method starts with you agreeing on the required amount of money. The lender will then provide in one lump sum. The lender will have visibility into the business sales since they’re connected to your card payment provider. This way they can deduct an agreed fixed amount or a certain percentage of the payments received. This is one of the most preferred options among unsecured small business loans.

The advantages of a merchant cash advance

• Unsecured loan: You don’t need collateral to take out this type of small business loan.
• Grants full transparency: As the lender will have complete transparency over your income through the payment processor, you will have to do less administration.
• No hard credit checks: Due to the business loan type, it will be a soft credit check – so it will not affect your credit.
• Full flexibility: If your business has a seasonal operation, a merchant cash advance is a great solution, as you only need to pay its fees when revenue is generated.

Best unsecured loans – Line of credit

What is a line of credit?

Although the line of credit is also available in secured form, an unsecured line of credit is the right financial help for new businesses or if your business has a low credit score.

The line of credit is the maximum amount available to you, which the financial institution will payout in one lump sum on flexible terms. Upon repayment, the agreed interest will be due, after which the credit line will be available to you again in full.

(Source: Investopedia)

Am I eligible for an unsecured business line of credit?

The lender decides this on a case-by-case basis based on the available financial history as well as the current state of the company and its future plans.

Best unsecured loans – Invoice factoring

What is invoice factoring?

Invoice factoring can provide quick financial support for both startups and established businesses. In factoring, the lender purchases the invoice and collects the receivable itself. Then paying the value of the invoice to the issuer in advance at a discounted value. (Source: Investopedia)

Why is invoice factoring beneficial for my business?

Invoice factoring is a type of unsecured loan that is highly flexible and easy to arrange. The authenticity of the underlying invoice can be verified immediately and the probability of payment calculated. However, factoring is not free. The lender typically sets the factoring fee based on the invoice recipient, underlying contract, amount, due date, and other factors.

Which is the best unsecured business finance method?

The best unsecured business loan fits your company’s current goals and puts the least strain on its future financial health. When seasonal businesses have a financial shortfall, taking out a long-term loan to tide them over is unnecessary. A line of credit or merchant cash advance offers a much more affordable and flexible solution.

The good news is that if your existing, stable business needs quick financing, you can easily get help even in unsecured business loans bad credit situations. Contact us for more details.