Businesses have been getting small business loans from banks for a very long time. The bank gives your business a large sum of money. In return, you put up some assets to serve as collateral. That gives the bank a tangible form of security – if you default, they get your assets. So if secured business loans have served well for so long, what’s all the talk about unsecured business loans for small businesses? Are they even safe?
Today, small business owners have more choices than ever when it comes to financing. But each business is unique. The funding alternative that’s right for your restaurant may not make sense for your doctor’s growing practice. However, an unsecured business loan offers potential benefits for a wide range of businesses. And an unsecured business loan can be used for many purposes. Perhaps it is a safe, smart choice for you.
WHAT MAKES AN UNSECURED BUSINESS LOAN SAFE?
No collateral required
By definition, an unsecured business loan does not require collateral. That’s a significant safety net for your small business. And for you as the owner. You don’t have to worry about losing vital business (or personal) assets if something goes wrong and you can’t repay the business loan. While that’s a benefit for you, it increases your lender’s risk. Without collateral, they will find another way to reduce their risk, such as charging higher interest rates.
That being said, for many small businesses, eliminating the need for collateral opens doors. You may not even have any assets to secure business funding. So a traditional business loan is out of the question. An unsecured business loan is your only option. Fortunately, there are several different types of unsecured financing tools for businesses.
Higher approval rates
Banks are notoriously stingy when it comes to small business lending. But your chances of approval are better if you seek an unsecured merchant loan. That’s “safe” because you’re more likely to get the money you need. With that money in hand, you will have enough cash to protect day-to-day business continuity. Or support near-term growth. Your business is safer because it’s stronger.
Obtaining an unsecured business loan is faster because the lender doesn’t have to spend time appraising your collateral, filling out forms, waiting on documents from other sources, etc. The process is simpler and more streamlined.
Speedy funding can make all the difference for small businesses. You rarely have the luxury of waiting weeks or months for a traditional loan to come through. Or not. Quick approval and funding can pull you out of a jam, whereas waiting could kill your business. It can also give you ready cash to take advantage of a timely opportunity. Just as with higher approval rates, the speed of an unsecured loan can strengthen your business.
You can borrow more
Maybe. Some experts disagree about this. With any secured business loan, the amount you can borrow depends on the value of your collateral. And you cannot borrow 100% of that value. So you may be able to get a larger unsecured business loan, because you aren’t limited by asset value.
Bad credit isn’t a deal-killer
When your business and/or personal credit isn’t great, it’s easy to become discouraged. The right type of unsecured business loan can bring hope and renewed prosperity. And it can help you improve your credit score. At United Capital Source (UCS), we believe each business deserves every chance to succeed. And we can help. So let’s talk.
Traditional business loans from banks and similar financial institutions come with fixed monthly payments. Even if you qualify, that repayment schedule might present a hardship for your small business. Alternatives such as an unsecured business loan can provide different repayment options. Here at UCS, we offer five payment choices:
- A percentage of credit card transactions
These options allow you to match repayment amounts and timing with your expected cash flow. That can be very different from one business to another.
With some unsecured funding solutions, there is nothing to repay. Accounts receivable financing is an example. You sell your outstanding invoices to a third party at a discount. They are repaid when they collect the full value of those invoices. Instead of charging interest, their profit comes from collecting more than they paid you for each receivable.
Build a long-term relationship with your lender
Some types of unsecured financing for businesses make money available on an ongoing, revolving basis. Over time, the lender gains confidence in your consistent repayment track record. They may be willing to lend your business more money in the future. While good relationships are always important for business success, here at UCS we caution against zeroing in on a single lender.
We have great working relationships with hundreds of diverse, top quality lenders. But we aren’t tied to any one of them. That way we can match your current funding need with the ideal source and type of small business loan. Sticking with a single company can hamper your ability to get the best deal next time around. That’s not safe because it puts your business future at risk.
TYPES OF UNSECURED BUSINESS LOANS
I recently quoted https://www.sba.gov/blogs/which-unsecured-business-lines-credit-are-best-your-business Marco Carbajo, who wrote a guest article for the SBA about unsecured business lines of credit. He noted that 29% of small businesses have had their lines of credit reduced in recent years. But he also recommends getting a business line of credit. “When the going gets tough,” he says, “a business can fail unless it has access to cash on demand. For business owners, getting unsecured business lines of credit is by far the best choice for having that cash on demand.”
He goes on to note there is a big difference between bank-issued and non-traditional lines of credit. With a bank, you’ll need “a substantial amount of documentation in order to qualify such as financials, personal tax returns, business tax returns, bank account information, business registration documents, etc.” You’ll have to pass an annual review to keep your line. This may be a “safe” form of financing. But the time investment could be overwhelming for you as a small business owner.
Carbajo recommends bank credit cards instead. He believes they offer greater flexibility without all the hassle. On the other hand, if your credit score is too low, you probably won’t qualify. It’s good to know you have other options when it comes to an unsecured business loan. Those may be:
- Accounts Receivable financing (factoring)
- Merchant Cash Advance (loans against credit card sales)
- Short term business loans (working capital loans)
- Business Line of Credit
Unsecured business loans come in all sizes, too. Banks and other financial institutions prefer to lend large sums of money. But small businesses rarely need so much. And you never want to borrow more than you need. With unsecured options, you can borrow the just-right amount, whether it’s a couple thousand dollars or $50,000. Then you can use it to:
- Purchase equipment or supplies (you’ll want equipment-specific financing for high-dollar purchases)
- Increase inventory
- Catch up on business bills
- Cover payroll when sales are slow
- Secure working capital for larger projects such as a remodel or expansion
HOW UCS HELPS
It’s our mantra at United Capital Source: always do what’s right for our small business owners. Read the UCS story here, and find out how we changed the game for small business loans. Working with us can be a game-changer for your small business, too. Why?
We have access to a wide variety of financial lenders. We can link you with the right type of unsecured business loan, the right lender for that type of financing and the best rate available. You can get approved quickly, typically within 24 hours. Get your money quickly, usually in a few business days. Without collateral or a personal guarantee.
We’ll put you in a program individually tailored for your business. You can have complete confidence in the lender, because they are already vetted by our UCS team. And you’ll have a dedicated account rep by your side. Not only to navigate this transaction, but whenever you need their help. We here to answer your questions and help your business succeed.
BEWARE OF PERSONAL GUARANTEES
Some lenders offer “unsecured” business loans that actually do require some collateral. That comes in the form of a personal guarantee. As the owner, you are putting up personal assets instead of assets that belong to your business. That might be your car, your home or other property you own, even the retirement savings in your 401k or IRA. If you default on the business loan, the lender can go after any or all of these personal assets. It is an unwise business practice to inter-mingle personal and company finances.
Many entrepreneurs use their own money or other assets to start their business. But you want to think very carefully about putting your personal belongings on the line for a business loan. As Christine Lagorio-Chafkin notes, you are acting as the loan’s co-signer. She says personal guarantees are becoming more common for traditional loans, too. “The Small Business Administration now requires that all loans it guarantees must also be personally guaranteed by anyone with a 20 percent or greater ownership stake,” she writes. “Other lenders have followed suit.”
Providing a personal guarantee may be the right move, but be confident about that before you sign.
OF COURSE THERE ARE RISKS
An unsecured business loan isn’t a free ride. Unsecured doesn’t mean unqualified. Certain eligibility criteria will still apply. Those factors are likely to include:
- Credit score or credit history (business and/or personal)
- Time in business
- Sales/revenue history
- Type of business
- Amount desired
- Loan purpose
Bad credit may not be a problem. Other positive factors can still make your business a viable risk. But different lenders look at your business in different ways. This is why we at United Capital Source feel so strongly about individually tailoring each loan request. We aren’t helping your business if we don’t place you in the best possible small business loan. Who knows? That may be an option that requires collateral after all. If so, you can be sure we’ll explain why we think that’s your best bet. For this business loan, anyway.
Because they are riskier for lenders, unsecured business financing comes with higher interest rates. In fact, interest can be very high for some forms of financing. This is one reason it’s important to learn the pros and cons of each option before you make a decision. The negatives do not necessarily make unsecured business loans unsafe. But they remind that you must read the fine print and know what you’re signing up for. You want to choose the right funding option, and you want to make the most of the money you receive.
Here at UCS, we take a holistic approach to helping each small business client. Making deals is not our objective, because that’s short-sighted. We want to establish long-term relationships. That way we can truly help your business grow, rather than simply “selling” you a business loan of some kind. You need unbiased, professional advice that steers you in the right direction. To match you with that, we have to know where you want to go – your vision and goals for your auto shop or café or salon or clinic. We take the time to learn your back story.
Money makes the world go round. And that includes the business world. Unsecured business loans are safe for your small business because they are effective. You can get money quickly for virtually any need. And you won’t put your business assets at risk. That gives you the power and flexibility to transform your business into a thriving success story.