Unsecured business loans are flexible loans that don’t require a business owner to offer their own personal or business collateral to secure the loan. This is a valuable source of financing for business owners that don’t have assets, which can be seized if you fail to repay secured loans.

Want to learn more about unsecured business loans? Here’s a look at the different types and how each can be used.

Types of unsecured business loans

Here’s a look at the common types of unsecured business loans.

Type of unsecured loan Description Best for
SBA loans
  • Loans insured by the Small Business Administration.
  • Lower rates and fees
  • Purchases under $25,000
  • Borrowers with low credit scores
Term loans
  • Lump-sum of cash.
  • Longer repayment periods
  • Low interest rates
  • Long-term financing
  • Equipment loans
  • Small-to-medium-sized borrowing needs
Business lines of credit
  • Revolving line of credit
  • Interest only accumulates on used portion of funds
  • Short-term funding
  • Seasonal cash flow shortfalls
  • Emergencies
Merchant cash advances
  • Advance against future sales
  • Repay using a portion of debit and credit card sales
  • High rates and fees
  • Emergency  or seasonal shortfalls
  • Borrowing costs that can be repaid quickly
Invoice factoring
  • Sell invoices to factoring company at a cost
  • Cuts down on wait time for invoice payments
  • Get paid for invoices more quickly
  • Companies that rely on invoicing customers
  • Businesses that need to improve immediate cash flow
Business credit cards
  • Revolving credit
  • Interest-free financing if you don’t carry a balance
  • May have sign-up bonus or other perks
  • Business owners with good-to-excellent credit
  • Everyday purchases

8 ways you can use an unsecured business loan

One of the things that makes unsecured business loans so popular is their flexibility. You can use them for just about any business-related purpose.

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Bankrate insight

Unsecured loans aren’t always “unsecured.” Even though you don’t have to provide upfront collateral to back the loan, most lenders require a personal guarantee to secure the loan in case of default.

1. Startup costs

Starting a business can require a lot of capital. You may need to buy or rent a location, purchase machinery, hire employees, get inventory, advertise, and generally spend a lot of money before you can start making money.

Both SBA and term loans let you borrow medium-to-large amounts of cash and offer predictable repayment periods, making them ideal for startup costs. But if you struggle to qualify for financing, you may be able to get a business line of credit or business credit card.

Best types of loans to cover startup costs: 

  • SBA loans
  • Term loans
  • Business lines of credit
  • Business credit card

2. Day-to-day operations

Keeping your business running daily means paying regular costs, such as wages, utility bills, and rent. You want more flexible forms of financing because you never know when you might face a cash crunch, making lines of credit and credit cards good choices here.

Invoice factoring is also an option if you have a lot of accounts receivable and need to cover immediate costs. You can get paid for your invoices quickly at the price of losing a few percent of the invoiced amount.

Best types of loans to cover day-to-day operations:

  • Business lines of credit
  • Invoice factoring
  • Business credit cards

3. Purchase equipment

Equipment can be quite expensive and many businesses use equipment loans to buy it. These loans are more accessible than other types of loans and don’t require you to provide your own assets to secure the loan since the equipment you purchase acts as collateral.

Unsecured term loans are also a good fit, especially if you have good or excellent credit. SBA loans may also be an option, as the SBA doesn’t require collateral for loans under $25,000.

Best types of loans to cover equipment purchases:

  • Equipment loans
  • SBA loans
  • Term loans

4. Inventory

If you’re trying to buy inventory, lines of credit are a great option. Their flexibility means you can use them to buy inventory when running low, even if you haven’t been paid for recent sales yet.

If you want to take advantage of discounts for buying in bulk, which can often be 5 percent to 10 percent or higher off the regular price for large purchases, you might consider larger loans like a term loan.

If you’re trying to take advantage of early payment discounts on invoices you receive, you might use invoice factoring to get paid for your sales quickly enough to hit the discount deadline. If you can factor for a cost that is lower than the discount received, you’ll come out ahead.

Merchant cash advances could be a good option if you have bad credit and struggle to qualify for other types of loans. They can also be helpful for emergency inventory purchases. But the interest rates and fees can be far higher than other types of loans.

Best types of loans to cover inventory purchases:

  • Business line of credit
  • Business credit card
  • Term loan
  • Invoice factoring
  • Merchant cash advance

5. Real estate

An unsecured SBA loan for under $25,000 is an option to cover real estate costs. But even though the SBA doesn’t require collateral, the lender that provides the SBA loan might. So check before applying.

For other types of real estate financing, including loans with higher amounts, term loans will use the property you’re purchasing to secure the loan. This can lead to more favorable terms and save you from having to find an asset to back your loan.

Best types of loans to cover real estate: 

  • SBA loans
  • Term loans

6. Debt consolidation

Which of these options works best for consolidating business debt will depend largely on how much you owe.

An unsecured SBA loan could work for debt under $25,000. The rates and fees for this type of loan will be more favorable than other types of unsecured borrowing. For larger amounts, you may be able to get an unsecured term loan, but compared to secured business loans, expect to pay more.

If you only have a small amount of debt, a business credit card with a 0% APR promotional period is a great choice. You can use it to consolidate debt and avoid interest charges for an extended time.

Best types of loans to cover debt consolidation:

  • SBA loan
  • Term loan
  • Business credit card

7. Expand or buy an existing business

When your business is ready to grow, an unsecured loan could help. An unsecured business loan can help you purchase a new location, remodel an existing location or purchase an existing business or piece of land.

Best types of loans to cover expansion or buying an existing business:

  • SBA loan
  • Term loan

8. Build credit

Building credit for your business is important because it will make future borrowing easier and cheaper. A credit card is one of the best ways to do this because they’re typically easy to get and you can build credit for free if you pay your balance in full each month.

Term loans and business lines of credit are also good options because they often have reasonable interest rates compared to other loans. SBA loans can also be used, especially if you don’t have strong credit because of their easier qualification requirements.

When choosing a loan, make sure the lender reports to each of the three major business credit bureaus: Equifax, Experian, and Dun & Bradstreet. Also, make sure you can afford the loan and won’t miss payments or default. Building credit takes time and will take longer if you start on the wrong foot.

Best types of loans to build credit:

  • Business credit card
  • Term loan
  • Business lines of credit
  • SBA loan

What can you not use an unsecured business loan for?

There are some limits on how you can use an unsecured business loan.

The most obvious is that you need to use them for business purposes. You can’t get an unsecured business loan and then use it for a personal purchase, such as a car or home goods. You also can’t use it to pay personal debts.

Some lenders will also limit how to use the funds or may refuse to lend to companies in certain industries. Commonly excluded businesses are:

  • Gambling
  • Adult entertainment
  • Drugs
  • Multi-level marketing
  • Financial services and day trading

Bottom line

The best unsecured business loans come in many forms, each with different features, pros, and cons. Make sure you choose the right loan for your purposes. Before applying for any loan, take the time to shop around and compare offers from multiple lenders. Putting in the effort will help you find a good deal and save money.

Frequently asked questions

  • You can use a business loan to pay your company’s bills, such as rent or utility bills. But you can’t use it to pay your personal bills, such as personal credit card debt or student loans.
  • No, a business loan can only cover business-related purchases and debt.
  • Yes, it is possible to get a business loan with bad credit. Some lenders are willing to work with business owners with credit scores as low as 550. There are also bad credit business loans that may be even more accessible. This includes invoice factoring and merchant cash advances. Keep in mind that these loans will cost far more than what you’d pay if you have good or excellent credit.