Unsecured Working Capital Loans: 6 Key Characteristics

A working capital loan can be a great financing option if you need extra funds for your day-to-day operations.

Whether you are looking to bridge the gap between accounts receivable and accounts payable, cover expenses during slow periods, or handle emergencies, this type of financing gives you quick access to funds when you need them the most.

However, if you are looking to secure an unsecured working capital loan, it is important to get a clear understanding of its characteristics and implications – this way, you can make the best decision for your business.

So, here are some of the most important characteristics of unsecured working capital loans:

Secured vs Unsecured Working Capital Loans: What Are The Differences?

While both secured and unsecured working capital loans are designed to help your business manage its short term needs, there is one key difference that sets them apart: collateral.

With secured capital loans, you will need to provide collateral, aka an asset of value – such as real estate, equipment, inventory, receivables or intellectual property, which serves as a security for the lender in case you default on the loan.

In the event of failing to repay the loan, the lender can seize the collateral to try and recover any potential losses caused by defaulting. Unsecured working capital loans, on another hand, don’t require collateral – however, this also has its implications.

Let’s take a look:

What Are the Main Characteristics of Unsecured Working Capital Loans?

Just like any type of business loan, unsecured working capital loans have their own characteristics – let’s take a look at some of the most important:

1. Lack of Collateral

Undoubtedly, the key characteristic of unsecured business capital loans is the lack of collateral – in other words, you don’t have to pledge a valuable asset for the lender to seize in the case of default.

This means that you are not at risk of losing your business assets (as opposed to secured business loans), which can give you peace of mind – especially if you are pledging an essential asset that is valuable for the proper operation of your business.

2. Higher Interest Rates

Since collateral reduces risk for the lender in case you fail to repay the loan, unsecured working capital loans tend to have higher interest rates than secured ones because there is no such guarantee.

Since the lack of collateral makes lenders more exposed to risk, they offer higher interest rates which serve as a buffer. This provides them with additional income that can help mitigate the overall impact of loan defaults within their portfolio.

By charging higher interest rates, lenders can maintain profitability even if some borrowers fail to repay their loans. So, if you are looking to get an unsecured working capital loan, be prepared for a higher cost of borrowing.

Scenario: Business Loan For a Retail Store

To better understand the differences in interest rates, let’s compare how they would look for secured vs unsecured working capital loans. Let’s say you are taking a working capital loan for your small business for the amount of $50,000, to be paid within 36 months.

So, you will end up paying approximately $5k more for the same amount if you are taking out an unsecured loan vs a secured one.

3. Smaller Loan Amounts

Another key characteristic of unsecured working capital loans is the loan amount – which often tends to be shorter compared to the amount you can get if you were applying for a secured capital loan.

Since the lender has no collateral to claim if you default, it means that they are relying solely on your ability to repay based on your creditworthiness and financial situation. If you fail to repay, the lender has limited recourse, which makes the loan riskier.

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

In addition, lenders often set stricter credit limits for unsecured loans, which means that you can qualify for larger amounts through secured loans – since the lender can base the loan size on the value of the collateral.

Scenario: Working Capital Loan For a Local Clothing Store

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

4. Credit-Based Approval

Among the most important characteristics of unsecured working capital loans is that they are primarily based on your creditworthiness, which means that they put more importance on credit score compared to secured ones.

A high credit score – ideally, 700 or above, reflects your history of managing debt responsibly, including timely payments, low credit utilization, and minimal delinquencies. The higher the credit score, the more likely you are to get better terms and lower interest rates.

A strong credit score helps lenders mitigate the risk of default, as it suggests that you have a proven track record of repaying debts. For secured capital loans, on another hand, a credit score of 650-680 can be enough to get you more favorable terms and rates.

5. Shorter Repayment Terms

Speaking of the characteristics of unsecured working capital loans, we can’t forget to mention that these types of loans often have shorter repayment terms compared with secured working capital loans.

That’s because shorter terms are used to mitigate risk for the lender, in the same way they offer higher interest rates and smaller loan amounts. The repayment term might include 6 months, 12 months, 24 months, or up to 5 years.

In contrast, secured loans often come with longer repayment terms, which may go as high as 20 years depending on the amount, lender, and creditworthiness. The presence of collateral allows lenders to extend the repayment period, as they have the security of an asset to fall back on if you default.

6. Quicker Approval Process

And last but not least, unsecured working capital loans are also characterized by having a faster approval process than secured ones.

Since they don’t require documentation related to collateral, such as property deeds, equipment valuations, or inventory lists, the process is simplified, and lenders are able to streamline it more effectively while reducing paperwork.

Accelerated Approval: Because there’s no need to assess or verify collateral, the approval process for unsecured loans can be completed more quickly. Lenders can process applications faster, often within a few business days, depending on your credit profile and the lender’s procedures.

For example, with National Business Capital, you can get unsecured working capital loans as fast as 24 hours!

Qualifying For an Unsecured Working Capital Loan With NBC

If you want to qualify for an unsecured working capital loan, look no further than National Business Capital. With $2+ billion financed since 2007, multiple awards, and an experienced team of Business Finance Advisors, we have everything you need to find the best financing options for your project.

Are you ready to get started? Apply here.