A business loan can be a great way of financing if you need extra money for your day-to-day operations.
Whether you want to bridge the gap between accounts receivable and accounts payable, cover expenses during slow periods, or handle emergencies, this type of financing gives you quick access to funds when you need them most.
However, if you are looking to get an unsecured working capital loan, it is important to get a clear understanding of its features and implications – this way, you can make the best decision for your business.
So, here are some of the most important features of an unsecured working capital loan:
Secured vs Unsecured Working Capital Loans: What's the Difference?
While both secured and unsecured business loans are designed to help your business manage its short-term needs, there is one key difference that sets them apart: collateral.
With secured loans, you will need to provide collateral, which is an asset of value – such as real estate, equipment, inventory, receivables or intellectual property, which acts as collateral for the borrower in case of default on the loan.
If you default on the loan, the lender can take the collateral to try to recover any potential losses caused by the default. Unsecured work loans, on the other hand, do not require collateral – however, this also has its implications.
Let's take a look:
What are the Key Features of an Unsecured Payday Loan?
As with any type of business loan, an unsecured operating loan has its own characteristics – let's look at some of the most important ones:
1. Lack of Collateral
Undoubtedly, the main feature of an unsecured business loan is the lack of collateral – in other words, you don't have to pledge valuable assets for the lender to take in the event of a default.
This means you're not at risk of losing your business assets (unlike a secured business loan), which can give you peace of mind – especially if you're pledging a valuable asset that's critical to the success of your business.
2. High Interest Rates
Since collateral reduces the risk to the borrower in the event of default on the loan, unsecured working capital loans often have it. high interest rates rather than those that are secure because there is no such guarantee.
Since the lack of collateral makes lenders more exposed to risk, they offer higher interest rates that act as a buffer. This provides them with additional income that can help offset the overall impact of loan defaults on their portfolio.
By charging higher interest rates, lenders can keep profits even if other borrowers default on their loans. So, if you want to get an unsecured working capital loan, be prepared high cost of borrowing.
Status: Retail Store Business Loan
To better understand the difference in interest rates, let's compare how they would look at a secured loan versus an unsecured work loan. Let's say you take out a working capital loan for your small business in the amount of $50,000, payable within 36 months.
| Unsecured Performance Loan | Secured Working Capital Loan |
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Therefore, you will end up paying about $5k more for the same amount if you take out an unsecured loan compared to a secured one.
3. Small Loan Amount
Another important feature of an unsecured working capital loan is loan amount – which is usually short compared to the amount you would get if you were to apply for a secured loan.
Since the lender has no collateral to claim if you fail, it means they only rely on your ability to repay based on your creditworthiness and financial situation. If you fail to repay, the lender has limited recourse, making the loan more risky.
To manage this high risk, many financial institutions reduce their exposure by offering small loan amounts for unsecured working capital loans. By borrowing less money, they reduce the potential loss in the event of a default.
Additionally, lenders often set strict credit limits for unsecured loans, which means you can get larger amounts with secured loans – since the lender can base the size of the loan on the amount of the collateral.
Status: Active Consignment Store Loan
Let's say you are a local clothing store with annual revenue $500,000and looking to get a working capital loan to buy seasonal inventory.
| Unsecured Performance Loan | Secured Working Capital Loan |
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4. Credit-Based Authorization
Among the most important features of an unsecured working capital loan is that it is primarily based on your own eligibilitywhich means they place more importance on credit scores compared to guaranteed ones.
High credit scores – ideally, 700 or more, it shows your history of responsible credit management, including on-time payments, low credit utilization, and low delinquency. The higher the credit score, the more likely you are to get better terms and lower interest rates.
A strong credit score helps lenders reduce default risk, as it suggests you have a proven history of paying debts. With a secured loan, on the other hand, the credit score of 650-680 may be enough to get you favorable terms and conditions.
5. Shorter Payment Terms
When we talk about the features of unsecured loans, we cannot forget to mention that these types of loans usually have them. short payment terms compared to guaranteed performance loans.
That's because shorter terms are used to reduce risk for lenders, the same way they offer higher interest rates and smaller loan amounts. The repayment period may include 6 months, 12 months, 24 months, or up to 5 years.
In contrast, secured loans often come with long payment termswhich can be up to 20 years depending on the amount, lender, and creditworthiness. Having collateral allows lenders to extend the repayment period, as they have the security of an asset to fall back on if you default.
6. Expedited Approval Process
Finally, unsecured working capital loans are also characterized by having fast approval process than those that are protected.
Since they do not require collateral-related documents, such as property titles, property valuations, or inventories, the process is simplified, and lenders are able to streamline it while reducing paperwork.
Expedited Approval: Because there is no need to check or verify collateral, the unsecured loan approval process can be completed very quickly. Lenders can process applications quickly, usually within a few business days, depending on your situation credit profile and borrower procedures.
For example, with National Business Capital, you can get an unsecured business loan as fast as 24 hours!
Qualify for an Unsecured Working Capital Loan through NBC
If you want to qualify for an unsecured working capital loan, look no further than National Business Capital. With $2+ billion in funding since 2007, multiple awards, and an experienced team of Corporate Finance Advisors, we have everything you need to find the best financing options for your project.
Are you ready to get started? Apply here.
