How Risky Is an Unsecured Loan

What Is an Unsecured Loan?

An unsecured business loan is financing that doesn’t require collateral such as equipment, trucks, or property. Instead, lenders base approvals on your credit score, business cash flow, and financial history.

Unlike secured loans or equipment financing, no asset is pledged. That makes unsecured loans faster and more flexible — but also riskier.

Explore Mehmi’s unsecured business loan programs to see if they fit your needs.

Risks for Borrowers

1. Higher Interest Rates
   
   
   • Rates often range from 8% to 30%+, compared to lower-cost secured loans.
     
     
   • The higher cost reflects lender risk, since no collateral is pledged.
     
     
2. Personal Guarantee
   
   
   • Many “unsecured” loans still require you to personally guarantee repayment.
     
     
   • If your business defaults, you may be legally responsible for repayment.
     
     
3. Credit Impact
   
   
   • Missed or late payments affect both business credit and personal credit scores.
     
     
4. Cash Flow Pressure
   
   
   • Repayment terms are typically shorter, with higher monthly payments.
     
     
   • This can strain businesses with uneven revenue cycles.
     
     

Risks for Lenders

• No Collateral to Recover – If the borrower defaults, the lender cannot repossess equipment or assets.
  
  
• Credit Risk Exposure – Lending decisions rely heavily on creditworthiness and financial statements, making startups riskier to fund.
  
  

This is why unsecured financing costs more — the lender is carrying significantly higher exposure.

When Unsecured Loans Make Sense

An unsecured loan may be worth the risk if you:

• Have excellent credit and can secure lower interest offers.
  
  
• Need fast capital for payroll, marketing, or inventory purchases.
  
  
• Don’t want to risk losing assets like trucks or heavy equipment.
  
  
• Only need short-term working capital, not a long-term loan.
  
  

For equipment-heavy companies, alternatives like asset-based lending or refinancing & sale-leaseback can provide liquidity with less credit pressure.

Case Study: Retailer in Toronto

A retail business in Toronto needed $50,000 to cover seasonal inventory. Without major assets, they qualified for an unsecured business loan with a 12-month repayment schedule at 14% APR.

• Upside: Fast approval within 48 hours, no collateral required.
  
  
• Downside: High monthly payments strained cash flow.
  
  

In the end, the retailer repaid on time but realized that if sales had dipped, the loan could have caused financial stress. For them, the risk was manageable but real.

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FAQ: How Risky Is an Unsecured Loan?

1. Are unsecured loans riskier than secured loans?
Yes — because you pay higher rates and may still sign a personal guarantee.

2. Can I lose my equipment or property?
No — but your credit and legal liability are at risk if you default.

3. What’s the main borrower risk?
High monthly payments and personal liability if business revenue falls.

4. Are unsecured loans good for startups?
They can be, if you lack assets. But rates are higher than secured programs.

5. How can I reduce the risk?
Borrow only what you can repay, and explore alternatives like lines of credit.

6. Should I choose unsecured or secured?
If you have collateral and want lower costs, secured is safer. If speed and asset protection matter most, unsecured may be worth it.

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Final Thoughts

Unsecured loans carry higher financial risk than secured financing. While they don’t put equipment or property at stake, they come with higher costs, personal guarantees, and repayment pressure.

At Mehmi Financial, we help Canadian SMEs compare unsecured loans with secured products like equipment loans and asset-based lending to find the safest balance of cost, speed, and risk.

Want to explore your options? Use our financing calculator or contact our credit analysts for a tailored assessment.