Best Unsecured Business Loans Of July 2023

It’s crucial to find the best source of financing for a business’ unique needs. To do so, evaluate why the business needs a loan, how much it needs to borrow and the applicant’s creditworthiness. Then, consider these factors when comparing unsecured business loans:

• Eligibility requirements. Lenders impose a range of eligibility requirements when vetting potential borrowers but generally require applicants to have a personal credit score of at least 680. Financial institutions also look at the business’ financial records to evaluate the prospective borrower’s ability to repay the loan.
• Loan types. There also are a number of business loan types—some of which are better suited for more specific financing needs. Evaluate whether you need money in a lump sum or prefer to access it on an as-needed basis. Likewise, consider whether a nontraditional financing method—like invoice factoring—might be a better fit than a term loan.
• Available amounts. In general, unsecured business loan amounts range from as little as $1,000 to $500,000. Choose a lender with borrowing limits that match your business’ borrowing needs so you don’t have to borrow more or less than necessary.
• Loan terms. A loan’s repayment term impacts the size of monthly payments and, therefore, whether a business can afford the financing. Be sure to select a lender that offers loan terms in line with your business’ budget and overall financial plans.
• Cost. The overall cost of a business loan can include interest as well as origination fees, late fees and prepayment penalties. Compare how much you’re likely to pay up front and over the life of each loan you consider.
• Customer support and reputation. Visit each lender’s website to learn about customer support tools and availability. Also, read online reviews to see what experiences real borrowers have had with customer support representatives and the borrowing process as a whole. Talk to other members of your community or industry to see if anyone has had a positive—or negative—experience with the lender before committing to a loan.

Unsecured business loans are a type of business financing that does not require the borrower to provide collateral in exchange for a loan. Just as there are several types of business loans, unsecured business loans come in many forms, each with its own characteristics and use. Common unsecured business loans include:

• Term loans. Term loans are what borrowers typically think of when they consider business loans—a bank lends a specific sum of money, with interest accruing over time and regular payments made over a set loan term. This type of financing is typically best for business owners who need to access a lump sum of cash rather than smaller amounts disbursed over several months or years.
• Business lines of credit. Unlike term loans, business lines of credit let borrowers access funds up to a certain limit on an as-needed basis. Interest only accrues on the outstanding balance—not the entire loan amount—and borrowers can access funds again once they’re paid off. This feature makes lines of credit an excellent option for business owners who need revolving access to funds to cover ongoing costs.

Related: Best Business Lines Of Credit Of July 2023

• Merchant cash advances. A merchant cash advance (MCA) occurs when a business borrows money from a credit card processor or other merchant services provider at a set factor rate (often 1.2 to 1.5) and in exchange for a portion of future transactions. Payments are made through automatic clearing house (ACH) payments daily or weekly until the balance is repaid. MCAs are usually best suited to businesses that need to access cash quickly and have a high volume of sales to cover payments.
• Invoice factoring. Invoice factoring is the process of selling outstanding invoices to a factoring company at a discount and receiving a portion of the invoice balance as an upfront payment. The factoring company then becomes responsible for collecting payment for the invoices.

Unsecured business loans are a type of business financing that does not require the borrower to provide collateral in exchange for a loan. Just as there are several types of business loans, unsecured business loans come in many forms, each with its own characteristics and use.

Types of Unsecured Business Loans

Common unsecured business loans include:

• Term loans. Term loans are what borrowers typically think of when they consider business loans—a bank lends a specific sum of money, with interest accruing over time and regular payments made over a set loan term. This type of financing is typically best for business owners who need to access a lump sum of cash rather than smaller amounts disbursed over several months or years.
• Business lines of credit. Unlike term loans, business lines of credit let borrowers access funds up to a certain limit on an as-needed basis. Interest only accrues on the outstanding balance—not the entire loan amount—and borrowers can access funds again once they’re paid off. This feature makes lines of credit an excellent option for business owners who need revolving access to funds to cover ongoing costs.
• Merchant cash advances. A merchant cash advance (MCA) occurs when a business borrows money from a credit card processor or other merchant services provider at a set factor rate (often 1.2 to 1.5) and in exchange for a portion of future transactions. Payments are made through automatic clearing house (ACH) payments daily or weekly until the balance is repaid. MCAs are usually best suited to businesses that need to access cash quickly and have a high volume of sales to cover payments.
• Invoice factoring. Invoice factoring is the process of selling outstanding invoices to a factoring company at a discount and receiving a portion of the invoice balance as an upfront payment. The factoring company then becomes responsible for collecting payment for the invoices.

Unsecured business loans may be available through traditional banks and credit unions. However, this type of business financing is more often offered through online lenders and alternative lenders. This may include financial technology companies—fintechs—that base lending decisions on a wider range of qualification requirements.

When to Choose an Unsecured or Secured Business Loan

If you’re trying to get a business loan, you may want to consider an unsecured business loan if you don’t own any valuable assets to pledge as collateral or you want faster funding times than available with secured options. That said, unsecured loans often come with higher annual percentage rates (APRs) and less flexible terms, so opt for a secured loan if you qualify for competitive interest rates and have the means to secure the loan.

As with other forms of business financing, unsecured business loans come with advantages and disadvantages—though these may vary by borrower and lender.

Pros of Unsecured Business Loans

• Collateral not required: Unsecured business loans don’t require borrowers to pledge any valuable collateral in exchange for funds. This makes unsecured loans an excellent financing option for newer businesses that don’t yet own real estate, equipment or other major assets.
• No risk of losing collateral: Because unsecured business loans don’t require borrowers to pledge collateral, there is a lower risk of a company losing its assets if it defaults on a loan. That said, lenders can still file a lawsuit to recover the unpaid balance, garnish revenue from the business or seize valuable assets like equipment and real estate.
• Faster application and approval: Due to the lack of collateral, lenders do not require an appraisal as part of the unsecured loan application process. This can translate into faster application and approval processes than available for secured options.

Cons of Unsecured Business Loans

• Smaller loan amounts: Unsecured loans pose more risk to lenders than secured alternatives. For that reason, lenders often offer lower borrowing limits on their unsecured financing options.
• Higher interest rates: Lenders can’t repossess collateral in the case of default, so unsecured business loans typically come with higher interest rates than their secured counterparts. In general, rates on unsecured business loans range anywhere from around 5% to 80% or higher.
• May be more difficult to qualify for: Because of the risk posed by unsecured loans, lenders may impose more demanding eligibility requirements than secured options. This means that it can be difficult to qualify for an unsecured loan if a business has bad credit, no credit or limited annual revenue.

If an unsecured business loan doesn’t seem like the right fit for you, consider one of these alternatives.

Business Credit Cards

Business credit cards function much like personal credit cards; however, you use the card to pay for business expenses. While interest rates on business cards may be higher than business loan rates, they usually have more flexible qualification requirements.

If you don’t need to borrow a large amount of money, a business credit card may be a better fit. Some providers even offer an introductory 0% annual percentage rate (APR) for highly qualified applicants. If you repay your balance during the intro period, this is essentially an interest-free loan.

Crowdfunding

If you want to avoid borrowing money altogether, consider crowdfunding. By using sites like Kickstarter and Indiegogo, you can raise money for your business. These sites let you set a funding goal and create reward tiers for people who back your project. However, if you don’t reach your goal, you usually get nothing.

We reviewed 18 popular lenders based on 16 data points in the categories of loan details, loan costs, eligibility and accessibility, customer experience and the application process. We chose the nine best lenders based on the weighting assigned to each category:

• Loan cost: 35%
• Loan details: 20%
• Customer experience: 20%
• Eligibility and accessibility: 10%
• Application process: 10%

Within each major category, we also considered several characteristics, including available loan amounts, repayment terms and applicable fees. We also looked at minimum credit score and time in business requirements and the geographic availability of the lender. Finally, we evaluated each provider’s customer support tools, borrower perks and features that simplify the borrowing process—like online applications, prequalification options and mobile apps.

Where appropriate, we awarded partial points depending on how well a lender met each criterion.

To learn more about how Forbes Advisor rates lenders, and our editorial process, check out our Loans Rating & Review Methodology.

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