Unsecured Small Business Loans
If you own a small business, or you’re thinking of starting one, you probably spend a lot of time wondering what your best finance options are. If you have a relatively young business, or a checkered credit history, many lenders will want you to secure your loan. This means that you’ll have to provide assets or other forms of capital to the lender as collateral – if you default on your loan they will have the rights to liquidate your collateral to help fund paying back what you owe them. Many traditional small business loans operate under this structure – lenders want to know that if your business fails they’ll still have a solid chance of getting their money back.
But many small business owners don’t want to secure their loans. It offers banks a way to shut down your business or seize certain assets – many feel this results in too much control over an individual’s livelihood. This can be especially true if an individual has signed over personal assets – it can be a huge risk to put your family’s well-being on the line in order to secure a loan with a lender.
So, what should you do if you need capital but don’t want to secure it against assets or personal items? There are a few different options available to you and one of the most popular of these is an unsecured business loan. It may sound too good to be true, but there are various different ways that you can attain an unsecured small business loan to help you start or invest in your business.
This article is a guide on how to get finance for your small business if you don’t want to secure your loan. Make sure to take in all the information so you have a true understanding if this is best possible financing option available for your business.
Unsecured Business Loans: The Details
Being able to obtain an unsecured business loan will depend on your financial viability and credit history. Those with extremely high credit scores may find it quite easy to get an unsecured business loan. Many lenders provide unsecured small business loans, but the terms at which they come vary drastically from lender to lender. There are traditional banks that provide unsecured small business loans, but these lenders will have higher qualification requirements than many other providers – but they also tend to have the lowest interest rates. If you want to get unsecured small business loans from one of these lenders, you will need to have a clean track record and a solid business plan. If you are a startup, you may find it hard to get an unsecured business loan since your business most likely has a fairly risky business model.
There are two primary ways that individuals try and get unsecured business loans. The first is through commercial lenders that provide a range of different financial products. It is best to head into their offices and ask to speak to a lending specialist about the different unsecured lending products they offer. If you’re ineligible for an unsecured loan, there may be other lending products they can offer that suit your needs without securing.
While many people still tend to go to traditional lenders in search of unsecured loans, the modern world has allowed for individuals to obtain unsecured loans directly online. There are now a number of very well-known online lenders that provide finance to clients who don’t want to have to go through the arduous process of applying at a brick-and-mortar bank. These online lenders also tend to have much lower requirement for receiving finance than traditional lenders do – the only downside is that they also have much higher interest rates. If you’re looking for fast, unsecured business loans, this is typically your best option. In truth, unsecured small business loans for startups almost don’t exist unless you’re willing to pay extortionate interest rates that will take away the viability of the loan.
Unsecured Business Loans Reviews
One of the most important parts about determining who to get an unsecured loan is ensuring that your lender is credible. You may find that large commercial banks have at trusted name, but many of the largest lenders in the country have horrible reputations with their client bases. Fortunately, the internet has made it very easy to find information about lenders and their customer relations. Head online and compare and contrast your favorite lenders. If you feel that a lender is offering you a good deal, but that he has horrible reviews from past clients, make sure to steer clear. You can’t underestimate how bad an experience can be if you use a lender with a bad reputation.
Advantages of Unsecured Small Business Loans
There are many advantages in getting an unsecured small business loan. Some of the primary benefits of getting unsecured small business loans are provided below:
- Low Risk – For the borrower, unsecured lending is substantially lower risk than secured lending. This simply comes down to the fact that borrowers aren’t risking losing assets or personal items in order to secure their loans. In addition, your business won’t be at risk of closing down should you fail to pay back your loan. This is in stark contrast to secured loans which will be able to claim certain components of your business should you default.
- Choice of Lenders – While many large lenders offer unsecured loans, there are also many online entrants to the market. This means you have plenty of lenders to choose from if you’re trying to obtain a small business loan. Make sure that you use this to your advantage – never accept the first lending opportunity that you are given.
- Short Payment Terms – Many unsecured loans have short payment terms, which is good for individuals who want to get out of debt quickly. This may mean that payments are larger, but it forces your business to operate more efficiently in order to meet debt requirements.
Disadvantages of Unsecured Small Business Loans
Depending on the type of business environment you operate in, there are also some disadvantages in attaining small business loans – these drawbacks are worth considering prior to taking out a similar loan. A list of the top disadvantages associated with unsecured loans is provided below:
- High Interest – The primary disadvantage in getting an unsecured loan is high interest rates. Because lenders have no way of getting their money back should you default, they must compensate themselves for the risk in some other way. This is especially true for unsecured small business loans for bad credit.
- Qualification – Because unsecured small business loans don’t have any collateral attached to them, it is much harder to qualify for them – especially if you want one from a commercial lender. You will most likely need to have a great credit score, as well as enough information to exhibit a viable business plan.
- Large Payments – Lenders are eager to get their money back quickly, and the short payment period may be seen as an advantage. But this also means that your payments are much larger, which creates problems for many small business owners who are trying to meet requirements. Not making these payments on time will have a terrible impact on your business credit score.
Other Forms of Unsecured Borrowing
If you don’t think that unsecured business loans are the right fit for your business, but you don’t want to risk securing your business loan, there are other forms of unsecured debt that may be of use to you or your company. Most of these lending products come in the form of revolving credit – which happens to be the most popular form of unsecured debt on earth. Business lines of credit and business credit cards are two examples of revolving credit that are commonly used by businesses in the United States. More information on these forms of unsecured debt is provided below:
Business Line of Credit
A business line of credit is a good option for those who want unsecured debt without getting a traditional unsecured business loan. A business line of credit is an amount of capital that is extended to you by a lender, you are then allowed to borrow up to the limit that the lender sets. One of the best aspects of business lines of credit is that you don’t pay any interest on the money that you don’t borrow – this is why it is called ‘revolving’ credit. In addition, most lines of credit are unsecured, so while the interest rate on the debt, the risk of losing assets is low. You can also access cash from your line of credit at no additional charge.
Business Credit Cards
Business credit cards are similar to a line of credit in that you don’t have to pay interest on the money that you don’t access. You can also give business credit cards to staff in order to pay for company expenses – this is part of the reason they are such a popular option for many business owners. In addition, they provide you with a card facility to help you pay for items that accept credit cards as payment. Like any form of revolving credit, business credit cards typically come with much higher interest rates than traditional loans – though this is not too much higher than what you would find with many forms of unsecured debt.
It is also important to note that if your business need access to cash on a regular basis, this is not the best option for you. Many credit card issuers charge extremely high fees and charges if you withdraw cash on their cards – cash advances are one of the most unaffordable ways to get cash for your business.
Tips and Tricks
If you do decide that small business loans are a good fit for your business, you should make sure to put yourself in the best position possible to get yourself the deal you need. If you have decent credit, you should opt primarily for lenders that are well established in the industry – commercial lenders have higher requirements but also have better interest rates than many online lenders.
If you do have a bad credit history, don’t let it deter you from applying for unsecured business loans. If you have a large amount of cash flow, meeting the inflated payments may not be an issue for your company. This is especially true if you believe the investment you will be able to input from your financing will have a positive impact on the efficiency of your business.
Another tip that you should follow if you’d like to ensure you’re fully aware of your responsibilities is to ask for a full break down of the costs of your loan. Many lenders will provide you with an interest rate and a principal loan amount, but this may not be the full picture of your liability. If you ask your lender for a full breakdown that includes a total cost of the loan, you’ll have a better idea about how it stacks up to competing loans.
Lastly, never accept your first offer. The key to finding the right finance is to compare and contrast different offers from different lenders. As mentioned previously, include their customer satisfaction record in this comparison. Also, don’t be afraid to tell a lender that you’re comparing their quotes to other financiers – this may make them more competitive with what they offer.
If you take in all the information in this article, you should have a good idea of how to get unsecured small business loans. Remember, the majority of unsecured loans are short term unsecured small business loans – make sure this is an appropriate funding model for your business. Unsecured business loan lenders will want to make sure that you are a viable candidate, if you want to secure a relatively low interest rate, make sure that you have all the information you need to convince them that you are a viable business owner.
In addition, it is often not worth getting an unsecured loan if your business is in good shape. If you know that you will be able to service your debt, there is not much point in paying additional interest to make your loan unsecured. This being said, it is definitely a way to reduce your risk – especially if your business doesn’t have enough assets to be able to provide substantial collateral.
Jason is a Senior Author for SBL. He has been working with small business owners like you for the past ten years. He graduated with an MBA and began a career as an independent financial consultant for small businesses in his state.