Unsecured Working Capital Loans: 6 Key Features

If you need additional funds for day-to-day operations, a working capital loan may be a good financing option.

Whether you’re looking to bridge the gap between accounts receivable and accounts payable, cover off-season expenses, or handle an emergency, this type of financing can give you quick access to capital when you need it most.

However, if you are looking to obtain an unsecured working capital loan, it is important to have a clear understanding of its features and implications so that 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 working capital loans are designed to help your business manage its short-term needs, they have one key difference: collateral.

With a secured capital loan, you provide collateral, which is a valuable asset such as real estate, equipment, inventory, accounts receivable or intellectual property that serves as security for the lender in the event you default on the loan.

If a loan is not repaid, the lender can seize the collateral to try to recover any potential losses caused by the default. Unsecured working capital loans, on the other hand, do not require collateral, but this has its implications.

Let’s take a look:

What are the main features of an unsecured working capital loan?

Just like any type of business loan, an unsecured working capital loan has its own characteristics – let’s take a look at some of the most important ones:

1. Lack of collateral

Undoubtedly, the main feature of an unsecured business capital loan is the lack of collateral – in other words, you don’t have to pledge a valuable asset for the lender to seize in the event of default.

This means you are not at risk of losing the assets of your business (as opposed to a secured business loan), which can give you peace of mind, especially if you are pledging key assets that are valuable to the normal running of the business.

2. Higher interest rates

Because collateral reduces the lender’s risk if you fail to repay the loan, unsecured working capital loans tend to higher interest rate More than guaranteed because there is no such guarantee.

Since the lack of collateral exposes lenders to greater risk, they offer higher interest rates as a buffer. This provides them with additional income that helps mitigate the overall impact of loan defaults in their portfolios.

By charging higher interest rates, lenders can maintain profitability even if some borrowers fail to repay their loans. So if you’re looking to get an unsecured working capital loan, be prepared Borrowing costs are higher.

Scenario: Commercial Loans for Retail Stores

To better understand the interest rate differences, let’s compare how they look for secured and unsecured working capital loans. Let’s say you are applying for a working capital loan for your small business in the amount of $50,000, payable over 36 months.

So if you take out an unsecured loan, you’ll end up paying about $5,000 more than a secured loan.

3. The loan amount is small

Another key feature of unsecured working capital loans is that loan amount – This will usually be shorter compared to the amount you can get if you apply for a secured capital loan.

Since lenders have no collateral to claim if you default, this means they rely solely on your ability to make repayments based on your creditworthiness and financial situation. The lender has limited recourse if you fail to repay, making the loan riskier.

To manage this higher risk, many financial institutions reduce their exposure By providing unsecured working capital loans in smaller amounts. By lending less, they limit potential losses in the event of a default.

Additionally, lenders often set tighter credit limits on unsecured loans, which means you can get a larger amount with a secured loan because the lender can size the loan based on the value of the collateral.

Scenario: Working capital loan for local clothing store

Let’s say you are a local clothing store with annual revenue of $500,000and you are looking to obtain a working capital loan for seasonal inventory purchases.

4. Credit-Based Approval

One of the most important features of unsecured working capital loans is that they are primarily based on your Creditworthinessmeaning they place more emphasis on credit scores than secured credit scores.

High credit score – Ideally, 700 or above, reflecting your history of responsibly managing debt, including timely payments, low credit utilization and minimal delinquency rates. The higher your credit score, the more likely you are to get better terms and lower interest rates.

A good credit score helps lenders reduce the risk of default because it shows you have a good track record of repaying your debts. On the other hand, for secured capital loans, the credit score is 650-680 Enough to get you better terms and rates.

5. Shorter repayment period

Speaking of the characteristics of unsecured working capital loans, we cannot forget to mention that such loans often have Shorter repayment period Compared to secured working capital loans.

This is because shorter terms serve to reduce the lender’s risk, just as they offer higher interest rates and smaller loan amounts. Repayment terms may include 6 months, 12 months, 24 months or up to 5 years.

In contrast, secured loans usually come with Longer repayment perioddepending on the amount, lender and creditworthiness, the term may be as long as 20 years. The presence of collateral allows the lender to extend the repayment period because they can rely on the asset as security if you default.

6. Faster approval process

Last but not least, unsecured working capital loans are also characterized by Faster approval process Than safe.

Because they do not require collateral-related documents, such as property deeds, equipment valuations, or inventory lists, the process is streamlined and lenders are able to streamline the process more efficiently while reducing paperwork.

Accelerated approvals: The approval process for unsecured loans can be completed faster as there is no need to evaluate or verify collateral. Lenders can process applications more quickly, usually within a few business days, depending on your situation Credit status and the lender’s procedures.

For example, through National Business Capital, you can get an unsecured working capital loan in as fast as 24 hours!

Qualify for NBC Unsecured Working Capital Loan

If you want to qualify for an unsecured working capital loan, look no further than National Business Capital. With more than $2 billion raised since 2007, multiple awards and a team of experienced business financial advisors, we have everything you need to find the best financing option for your project.

Are you ready to get started? Apply here.