Raising capital is necessary for both businesses and individuals at one stage or another. Businesses need funding to grow, be it through the purchase of a larger premises, updating equipment and machinery, or otherwise. A viable method for obtaining finance is just as important for private individuals, for an almost unending number of reasons, from purchasing property to funding their own entry into business. As such, having a viable method of raising finance is of universal importance.

Despite its importance, obtaining finance can be quite difficult. There are many options to choose from, each with its own advantages and disadvantages, and prerequisites for a successful application. What’s worse, it can be an even bigger challenge to obtain finance with bad credit. As such, it’s essential to know your options before you take action.

One such loan category is unsecured finance. This form of finance allows borrowers to raise capital without the need for collateral. However, it is a type of loan that is notoriously difficult for borrowers with bad credit to obtain. In this article, we will discuss unsecured business loans, how they work, and whether you could obtain one with bad credit.

What is an unsecured business loan?

An unsecured loan, simply put, is a type of loan for commercial use that does not require physical assets to be used as collateral. This means that borrowers assume less risk than they would with other types of finance, as they do not stand to lose assets used as collateral. While this is a significant advantage, unsecured loans cannot be used to raise as much capital as their counterpart, secured loans. Moreover, they tend to be used for a much shorter period of time, with the longer end being several years. This is considerably less than the secured loan standard of approaching 20 years.

Also Read: Unsecured vs. Secured Loans

How do unsecured business loans work?

Unsecured business loans work largely as the opposite of secured loans. The main difference, of course, is that unsecured loans do not require the use of assets as collateral to secure the loan against. While this does mean unsecured loans pose a lesser risk, it doesn’t mean they are entirely risk-free. Some lenders will require borrowers to sign a personal guarantee as part of the loan agreement. Should the borrower default, they will be required to pay the rest out of their personal finances.

As unsecured loans do not include physical assets as part of the loan agreement, the application process is a bit different compared to secured loans. Information regarding credit score, evidence of a stable income, and a lengthy financial history are of much higher importance. That being said, having a bad credit score or lacking a storied financial history for your business will not preclude you from any unsecured business loan. Plenty of unsecured lenders aim to cater to businesses in such situations.

What are the types of unsecured loans?

As unsecured loans are an umbrella category of finance, there is a wide range of different types. Let’s take a look at some of the most used types:

Short-term loans

As unsecured loans are geared towards providing finance over a short time span, it’s no surprise that short-term loans are one of the most popular uses. Using this type, borrowers will take out a typically small loan with a short repayment window. This is usually less than a year, but some short-term loans can exceed this timeframe. While credit rating and other aforementioned information are important under this type of loan, you can still obtain a short-term unsecured loan. Generally, you will need to show proof of solid income, demonstrating that you can make repayments, and potentially sign a personal guarantee if the loan is for business use.

Business loans

While the previous type of unsecured loan can be for either personal or business use, business loans are tailored specifically for commercial purposes. This type of loan tends to be used to purchase vital items for a business, such as modern equipment or light refurbishment of business premises, but does not raise as much capital as some other types of finance. As with other unsecured loans, business loans do not require collateral assets. There will likely be an emphasis placed on the financial health of your business, however, although your personal finances will not be as important.

Personal loans

Personal loans are another type of unsecured loan, this time being geared towards private individuals. The applications for a personal loan are quite varied, from funding the renovation of a private dwelling, to paying for university tuition, and much more. However, most personal loan lenders will not approve applications for commercial use. Personal loan lenders will also place more emphasis on a borrower’s credit rating and personal finance. While bad credit is not necessarily a dealbreaker, it may result in higher interest rates or other repayment terms.

Obtaining unsecured business loans with bad credit

Obtaining an unsecured business loan with bad credit works much the same as it would with good credit; you will make an application for your desired loan, provide the necessary information, and await the decision of your chosen lender. Where this differs from applying with good credit is emphasis; with bad credit, lenders will want to see strong and stable income, proof of a stable job with equally stable earnings or similarly strong business revenue, and evidence of your financial history. This is usually in the form of a series of bank statements.

In addition to more scrutiny being placed on certain aspects of your application, your repayment terms may be a bit different from others. Most notably, you will likely have to pay higher interest rates than you would with good credit. Depending on your lender, you may have other repayment terms to consider, such as a shorter loan length or approval only for smaller amounts. While this may be a bit restrictive, bad credit is not a cause for flat-out rejection.

In summary

All in all, it is possible to obtain unsecured business loans despite having bad credit. Your application will follow the same process as it would if you had good credit, and you’ll have no shortage of lenders willing to help you raise finance to achieve your business goals. However, you will likely be subject to different repayment terms than you would otherwise. These repayment terms are what you would expect; being higher interest rates and potential changes to the length of the loan. This is to better protect the interests of unsecured loan lenders, as they are more prone to risk than secured loans. That said, unsecured business loans are more than viable for borrowers with bad credit.