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What is an Unsecured Business Start up Loan?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 04 December 2016
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An unsecured business start up loan is financing used to cover the starting costs of a business, provided without collateral. The risks for the lender are higher, as recouping the cost of the loan will be difficult if the business defaults. Borrowers tend to have to pay higher fees and interest rates for unsecured loans, making them not very advantageous. People may choose to get an unsecured business start up loan for a variety of reasons, often related to lacking collateral.

Businesses usually need a large infusion of cash to get started. Premises and stock must be obtained and the business needs money available to cover payroll initially while the business gets going. Utilities usually require deposits, and there are a number of other expenses, including fees for business licenses, obtaining equipment, insurance premiums, and so forth. People who lack capital to cover these expenses can raise cash in a variety of ways, with loans being one option.

The preferred financing method is usually a secured loan, using something like the business premises or property owned by the business owner as the collateral. In the event the business fails, the lender can repossess the collateral used to secure the loan and sell it, using the funds to cover the loan and administrative costs. With an unsecured business start up loan, the borrower receives funding without providing something to back the loan.

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Borrowers who want this kind of loan usually need to have an excellent credit history, demonstrating the low risk associated with lending to them. They usually must also be willing to pay more in interest and may face higher origination fees as well, depending on policies at a lender. Lenders will also want to see ample documentation of the business plan, showing how the money will be used and providing information about when returns can be expected and what kind of money the business should generate. A loan officer can take applicants through the various documentation needed and provide information about things people can do to bolster their applications.

Once an unsecured business start up loan has been processed, the lender will decide how much money it is willing to offer and at what rate. People may be able to negotiate if they can get quotes from several lenders, potentially driving down the interest or accessing more funding. As soon as the paperwork is signed, the funds can be released to the borrower. Usually, the first payment on the unsecured business start up loan is due in 30 days, although some loans may allow a grace period to give the business a chance to get off its feet.

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