Unsecured business loans

You want funding without pledging assets as security – let’s talk about unsecured business loans

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    Michael David

    Page written by Michael David. Last reviewed on July 18, 2024. Next review due April 1, 2025.

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    If you do not own assets that you can provide as collateral or would simply prefer not to pledge your assets, an unsecured business loan might be a good fit. Join Swoop and we’ll quickly sift through the options from banks and other lenders to find the money you need.

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      What is an unsecured business loan?

      An unsecured business loan allows you to borrow without having to pledge business assets, such as property, equipment or machinery, as security for the loan.

      An unsecured business loan can provide working capital or funds to grow your business, and offer the predictability of fixed monthly payments with set payback period. They are relatively simple to apply for and a fast way to get an injection of cash if your business lacks assets, or if you would rather not secure your assets against a loan.

      There are many lenders who can provide unsecured business loans to new businesses and startups in Canada. Due to the range of choices available, it may be possible to find a solution even if you have bad credit or are looking to borrow funds with no personal guarantee.

      How do unsecured business loans work?

      An unsecured business loan provides your small business or startup with upfront capital without requiring security. There are many different unsecured business loan options out there, each with varying terms to suit different kinds of businesses.

      Because the lender does not need to spend time evaluating your collateral, you can usually access funding quickly – sometimes even on the same day. Depending on your needs, you can choose to take out a short-term loan that is repaid in a matter of months all the way to a long-term loan that is repaid over 10 years or more.

      You repay your loan in monthly or quarterly instalments over a fixed time frame and you may have the option to pay off your loan early, either with or without a penalty fee.

      Secured vs. unsecured business loans

      When you take out a secured business loan, you offer collateral to the lender such as real estate, vehicles or machinery. If your business stops making payments, the lender has the legal right to take the assets that were pledged as collateral.

      When you take out an unsecured loan, there is no collateral. Instead, the lender will base the loan terms mainly on your credit history, income and cash flow projections. If you miss payments, it will negatively impact your credit score and may make it more difficult and/or more expensive to qualify for credit in the future.

      Both types of loans are popular with new businesses and startups in Canada.

      What‘s an example of an unsecured business loan?

      An IT consulting business has landed several new clients in the past few months. While the future revenue potential is exciting, they need $50,000 in immediate cash to cover hiring and other expenses that will help them serve these new clients.

      Since the business consists mainly of people working on computers in a rented office space, it does not have significant physical assets that can be pledged as collateral for a secured business loan.

      Instead, the company applied for an unsecured business loan. By providing the lender with financial records from the past couple of years and some information about how the funds will be used, they were able to secure $50,000 in funding within 48 hours, which they will repay over the next two years with help from their increased revenue.

      What are the pros and cons of an unsecured business loan?

      Here are some of the advantages of unsecured business loans:

      • Fast approval. You can usually access funds more quickly and simply than other types of lending.
      • No security. You don’t need to put up any assets as security.
      • Predictable payment. You usually have fixed monthly or quarterly payments over an agreed time period.
      • Low fees. Upfront costs are usually minimal and sometimes zero.

      The main downside of unsecured business loans is you may only be able to borrow a smaller amount over a shorter time period and at a higher interest rate than you would with a secured business loan. This reflects the fact that the lender is taking on more risk by lending to you without any tangible security.

      That said, you can still obtain an unsecured business loan on favourable terms if your business has a solid track record and a good credit rating. Of course, if you do not own assets that you can pledge as security, an unsecured loan may be your only option. This is often true for new businesses and startups.

      Is a small business loan secured or unsecured?

      A small business loan may be secured or unsecured. You may prefer to have a secured business loan due to the potential for a lower interest and longer time to repay the loan. You may prefer an unsecured loan in order to avoid having to pledge your assets as collateral. There are pros and cons to both approaches, as well as practical realities in terms of the loan terms for which you are able to qualify.

      Join Swoop to begin exploring your options in minutes.

      What are the interest rates on unsecured business loans?

      The interest rate on a Canadian business loan is based on the Bank of Canada policy rate, plus an additional amount that reflects the level of risk being taken by the lender.

      You’ll generally pay more interest with unsecured loans, compared to secured loans, because they’re not backed up by any assets, which means there’s a higher risk for the lender. If your business has a solid track record and a good credit rating, you’ll likely be offered better interest rates.

      Join Swoop and we’ll scan the market to find the best rates for the funding you need.

      What happens if I default?

      Missing a loan payment or defaulting on a loan by failing to repay it in the agreed timeframe can have short- and long-term consequences for a business.

      Before you agree to a loan, you should check what the terms and conditions are for non-payment. If you miss a payment, you will most likely incur a fine, based on a percentage of your monthly instalments. You might also have to pay an administrative fee to the lender.

      The loan will usually not be considered officially in default unless you miss several payments, but sometimes all it takes is one. Again, read and understand the terms of the loan before you sign.

      If you default on an unsecured loan, you will not lose any business assets, since you did not provide business assets as collateral. However, if you’ve given a personal guarantee, your personal assets could potentially be seized to repay the loan.

      In any event, your credit score will take a hit. This means you’ll find it more difficult to access borrowing in the future, including other business loans. It can also impact your future business dealings, since many companies carry out credit checks on companies they’re considering working with.

      A bad credit score also means less favourable terms on future credit such as higher interest rates or inability to borrow without a personal guarantee. While there are ways you can improve your business’s credit rating, negative information can stay on your company credit file for years.

      How fast can I get an unsecured business loan?

      You can generally access funding quickly – often within only a few hours of applying. An unsecured business loan is usually a much faster option than a secured loan, because the lender does not need extra time to inspect and value your assets.

      How do I get an unsecured business loan?

      When you join Swoop, you can find an unsecured business loan fast. The application only takes minutes and we will scan the offers from banks and other lenders to quickly find you the best options.

      Written by

      Michael David

      Michael David is a financial writer and former investment advisor. Writing for Capital Group, Dimensional Fund Advisors, Franklin Templeton Investments, HSBC, Invesco, PIMCO, Vanguard, global insurance companies, major banks and others, he has educated professionals, business owners and consumers about strategies for investing, insurance, banking and corporate finance for more than 20 years.

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      At Swoop we want to make it easy for SMEs to understand the sometimes overwhelming world of business finance and insurance. Our goal is simple – to distill complex topics, unravel jargon, offer transparent and impartial information, and empower businesses to make smart financial decisions with confidence.

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