An unsecured loan is a loan that requires no collateral and is based solely upon the creditworthiness of the borrower. In reality, very few unsecured true business loans exist today, especially those for larger loan amounts. While a bank may offer an unsecured consumer loan or line of credit to a particularly credit worthy borrower, banks and other lenders typically prefer to secure loans with some sort of collateral.
A General Lien on Business Assets vs. Specific Collateral
A traditional lender like the bank is usually interested in specific collateral like real estate, equipment, or other valuable business assets. They will determine the loan-to-value ratio of your collateral based upon the nature of the asset. In other words, your banker may allow you to borrow, for example, against 70 percent of the value of appraised real estate or 60 to 80 percent of what they call ready-to-go inventory. Because individual lenders consider the loan-to-value ratio differently, you’ll need to ask any potential lender how they intend to set that value.
Some lenders, including many online lenders, don’t require specific collateral to secure a small business loan, but rather use a general business lien on business assets and a personal guarantee to secure the loan. This could make a small business loan easier to qualify for depending upon the nature of your business and your business assets.
While this type of business loan might include a higher interest rate than a similar, traditionally collateralized loan, there are some benefits you might want to consider:
- Application time is typically much shorter than a bank loan: Online lenders have set a new standard for quick application and approval times. The applications are short, simple, and straightforward—borrowers can often know in minutes if their loan application is approved. What’s more, once the application is approved, funds can be deposited in your business bank account as quickly as within 24 to 48 hours.
- Your loan is not dependent upon the value of any specific collateral: Unlike a traditional loan, the lender is making loan decisions based upon a range of factors, including the health of your business, your cash flow, and your personal and business credit profile. Sometimes this might even help you qualify for more money than you would with a traditionally collateralized loan.
While not a benefit unique to this type of loan, if your lender reports your good payment history to the appropriate business credit bureaus, your timely payments will help you build (strengthen) your business credit profile. This is important enough that you should ask before you sign any loan documents.
Ultimately, loans that are not required to be secured by specific collateral has opened up financing options to many business owners who don’t have the type of collateral a bank or other traditional lender might require to secure a small business loan.
OnDeck does not offer unsecured business loans, but click HERE if you’d like to learn more about the small business loans offered by OnDeck.