Unsecured business loans provide a critical form of funding for small businesses. In 2024, businesses relied on $261 billion in unsecured loans globally. That figure is expected to grow to more than $682 billion by 2034.

This type of funding is valuable because it can be used to cover everything from bills to the cost associated with increasing staff or growing your operations. Because they do not require any form of collateral, unsecured loans can also be more costly than some other types of borrowing.

To prepare for the cost of an unsecured business loan, it’s important to manage the unsecured business loan effectively to avoid any negative consequences from borrowing.

1. Choose the right lender for your situation

First, consider  different types of lenders and loans to find the right loan for your business, including loans from the government, as well as traditional banks, credit unions and online lenders. What to consider with each type of lender:

• Government-backed SBA loans: Loans backed by the government are available to help small business owners get access to funding who wouldn’t otherwise qualify for it. SBA loans often come with low interest rates and long repayment terms, making them an attractive option.
• Traditional banks and credit unions: Traditional banks and credit unions offer the widest variety of business loans to help you find the right type for your buusiness. They tend to offer competitive interest rates, though you typically need strong credit and finances to qualify.
• Online lenders: Online lenders typically provide a fast application and an equally quick funding process. Once a loan is approved, you may receive the cash in as little as 24 hours, which can be helpful when expected business expenses arise. The repayment terms offered by online lenders can also be more flexible, which is an important consideration when you’re looking for a loan to fit your unique needs and business budget.

2. Check your credit

Before applying for any loan, check your personal and business credit score. See if there are any errors on the report that you can get removed or if there is anything you can do to give your score a quick boost, like paying off small debts. Boosting your credit score  can help you secure a lower cost for your loans.

You should also monitor your credit score as you are paying off your unsecured business loan to make sure you are quickly correcting any issues that arise and avoiding errors that could damage your score.

Knowing your credit score ahead of time will also help you understand which loans you qualify for. Lenders often post their minimum credit requirements online, so there’s no need to waste time applying for lenders that won’t accept your business. If your credit is fair, you may want to call your preferred lender to see if it will accept your credit level.

How do you get a business credit score?

Establishing a business credit score takes time. To get started apply for an Employer Identification Number (EIN) from the IRS to separate your personal credit from your business credit. Opening a business bank account and a business credit card can also help build your credit profile, including establishing a track record of responsible debt payment.

3. Read your loan agreement

Before you sign any legal document, it’s important to make sure that you read it carefully and fully understand it.

Your loan agreement will outline how your loan works. You’ll see sections that show how interest is calculated when your payments are due and any loan fees. It also describes what happens if you miss a payment or have other problems with the loan.

Some common areas to look for in the agreement are:

4. Build payments into your budget

A business budget is essential to helping you manage your unsecured business loan. .Your budget should describe how much money the company makes, how much it spends, where the income comes from and where it goes. 

Make sure that your business loan payments are added to  your business budget as an expense. Adding it to your budget ensures that you prioritize making repayments and fit the repayments into your forecasts of income and expenses. 

You’ll also want to update your budget monthly or weekly and provide accurate forecasting for future revenue. Then, you can make adjustments to your budget to ensure you have enough money to cover all your debt repayments.

Each business will budget in different ways; some popular budgeting strategies include:

5. Pay your bills on-time

Paying your bill on time avoids additional penalty fees and damage to your credit.

Given the importance of timely payments, consider setting up automatic loan payments whenever possible or creating reminders about upcoming due dates. Automated payments ensure that your loan payments and other bills for your business are paid on time each month through recurring transfers.  You can set up autopay  through either your bank using a bill payment feature or  the lender may  allow you to set up autopay.

6. Pay more than the minimum – if it makes sense

Paying more than the minimum can be a good idea for some companies. Larger payments mean you’ll pay the loan off sooner than expected and get out of debt sooner. It will also reduce the amount of interest that accrues, saving you money.

There are cases where it isn’t a good idea, however:

• If your loan has a prepayment penalty: Check to ensure your loan doesn’t have a prepayment penalty. If the lender charges it, you’ll pay a fee if you repay your loan early. Consider if you’ll save enough in interest payments to cover the cost of the prepayment fee.
• If your loan has a factor rate: If your loan has a factor rate applied instead of an interest rate, paying the loan off early won’t actually save you any money. A factor rate is applied to the initial balance, and early repayment won’t reduce the fee.
• If it would negatively affect cash flow: If you put too much money toward loan payments, you might not have enough to cover other expenses. You’ll also want to consider opportunity cost. You might be able to use your extra cash more effectively, generating business growth that leads to more profits than the money you’d save by making extra loan payments.

7. Avoid having too much debt

Some debt isn’t necessarily a bad thing. Proper use of credit can help you grow your business more quickly, and you can use your new revenues to make loan payments.

If you borrow too much, you could be left with large loan payments that are hard to make, especially if business is slow and revenue less than expected. Excessive debt can also strain your business’s  cash flow and its ability to cover operating expenses.

It’s better to limit your borrowing and grow at a slower, more sustainable pace than to try to borrow too much and put pressure on your company to make big loan payments.

To help you decide whether you can take on new debt, consider using two measurements to understand your debt load:

• Debt-to-income ratio: This ratio measures how much debt you have as a percentage of your income. It’s best to keep your DTI to 36 percent or lower.
• Debt service coverage ratio: The DSCR measures how much income you have to cover all your debt repayments. You typically want to make sure you have a DSCR of 1.25, which means you have enough revenue to cover your debts and then some. The higher your DSCR, the better.
• Business budget: Consider whether the debt repayments can easily fit within your business budget, even during slow seasons.

8. Talk to your lender if you’re struggling

If you’re having trouble with repayments, reach out to your lender to discuss your situation. It’s better to take this step sooner rather than later in order to get help before the situation grows beyond control and impacts your credit. Many lenders are happy to work with you to help you manage your debt and would prefer that to you suddenly missing payments and going into default.

Your lender might be able to help you by offering a deferment or forbearance, giving you more time to come up with the funds to make your payments. They could also work with you to consolidate debt, restructure debt, refinance it, or, in the worst case, settle for less than you owe.

9. Avoid the consequences of not paying a business loan

If you don’t pay an unsecured business loan, there could be severe consequences. After a missed payment, your loan will enter delinquency. When this happens, the lender may assess late fees and other penalties.

If you miss payments for multiple months, your business loan goes into default. When this happens, the lender could immediately use the loan’s acceleration clause to demand full repayment. The lender could also bring legal action against your company to force payment, and if you signed a personal guarantee, your personal assets could be up for grabs.

Missed payments and loan defaults can also damage your credit, dropping your score and leaving negative marks that stay on your credit report for seven years. Bad credit can make future borrowing difficult, resulting in settling for bad credit business loans that are likely more expensive.

To avoid these consequences, make sure you reach out to your lender to discuss your financing options before the situation escalates.

10. Refinance if it makes sense

If your business is struggling to manage unsecured business  loan payments, refinancing may be able to make your loan more affordable. By refinancing you may be able to obtain a lower interest rate or extend the loan’s repayment term to reduce the monthly payments, or both. Refinancing can help you lower the montly costs so that your business can afford the repayments.

Before applying to refinance, review your business and personal credit score to assess your ability to qualify. Reviewing your debt-to-income ratio, along with your businesses revenue and profit is also a good step. The best qualified applicants have a solid credit score and a low debt-to-income ratio.

11. Keep personal and business finances separate

As a business owner, maintaining your business finances separately from your personal finances can be an important step, including when managing debt like an unsecured loan. 

By keeping your finances separate, you can  track your business cash flow and expenses and stay on top of bill payments, including for your loan. And without a business bank account, it can also be harder to obtain a loan in the first place.

Keeping your finances separate can also help you protect your personal assets should you default on a loan.

12. Have a plan to make payments in emergencies

Establishing an emergency fund or cash reserves as a business owner is an important way to navigate uncertainty or economic downturns that may impact your ability to continue making payments on a business loan. An emergency fund can help keep your business going during such unexpected developments and protect your credit score from being impacted by unpaid bills. As a general rule, experts recommend having enough set aside to cover three to six months of expenses in an emergency.

Secured vs. unsecured business loans

In short, the difference between an unsecured business loan versus a secured business loan is that an unsecured loan doesn’t require you to put up collateral. Not requiring collateral can be beneficial if you don’t have valuable assets that you can use or don’t want to risk having valuable assets seized. 

Consider the key differences between these two types of business loans to decide which one is best for you.

When to choose an unsecured business loan

The main reason you might choose an unsecured business loan over a secured business loan is to protect your business assets. You don’t have to put up valuable assets to back the loan, so the lender can’t immediately seize assets if you fail to make repayments. However, lenders can still sue you to go after your business and personal assets in the event of a default. 

Another reason to choose an unsecured business loan is if you don’t have valuable assets that you could use as collateral. Unsecured loans bypass the collateral requirements, helping you get a loan even without assets.

How to apply for an unsecured business loan

The application process for an unsecured business loan involves these steps:

1. Compare lenders and eligibility requirements. Shop around and consider both online and traditional brick-and-mortar banks to take care of your funding needs. Most lenders post their eligibility requirements online, so you can see if you will meet their qualifications before you apply.
2. Prequalify with multiple lenders. Once you’ve narrowed down your options, see if you can prequalify with lenders. Prequalification allows you to see the interest rates and terms the lender offers you without performing a hard check on your credit. Consider reputable lenders that offer you the best terms for a loan.
3. Get your documents in order and apply. Gather your financial and business formation documents to showcase to the lender and submit your application. Documents needed may include business bank statements, balance sheet, profit and loss statements, business plan, business formation documents and business licenses.
4. Wait to receive a response. The lender will reach out to you to let you know whether or not you were approved for the loan. It will also let you know if it needs additional documentation. Most lenders take a few weeks to process business loans, though online lenders often advertise funding within 24 to 48 hours.
5. Provide bank information to receive your funding. Once you’re approved, provide the details needed to receive the funding. It may take a few days for the funds to hit your account. Then, you can proceed to use the funds to cover business purchases.

Bottom line

As a business owner, understanding the various financial tools available to you and how to use them effectively can be key to your long-term success. When managed responsibly, unsecured business loans can be one of these valuable tools. But before borrowing, engage in due diligence to make sure your budget can accommodate loan repayment and you understand the loan terms and risks of borrowing.