Unsecured business loans are loans given to a borrower who hasn’t given up any sort of asset for collateral, and when you use those unsecured business loans to your advantage, you can make moves that put your company in a great position to succeed without ever putting an asset at risk.
Like any other loan, there are risks to acquiring an unsecured business loan. But if you think strategically and follow these tips, they can be an important boon for your growing company.
1. Know the different types of unsecured business loans.
Loans, including unsecured business loans, come in many shapes and sizes. They come in different repayment terms, interest rates, and formats. You should have a clear idea of exactly what you’re in for when seeking out the loan that’s right for you.
- Business Credit Card – exactly what it sounds like. A credit card is essentially an unsecured business loan in which you repay based on what you’ve spent the previous month. A business credit card could be a solid option if your expenses are minimal.
- Business Line of Credit – a bank’s line of credit that operates much like a credit card – you only make payments on what you draw down from the credit line.
- SBA Loans – traditional term loans backed by the US Small Business Administration. Some SBA loans do require collateral. These are very difficult to qualify for and acquire. You may want to contact the SBA with questions.
- Traditional Loans – you borrow a set amount of money and agree to pay it back by a certain point with interest. The first thing you think of when you think “loan”.
2. You can effectively use unsecured business loans for smaller expenses.
Because of the nature of an unsecured business loan – that is, the lender is giving you money based only on your promise to pay it back – lenders will likely charge you a higher interest rate than they would for a collateralized loan. That increased interest rate is the price you pay for not having your house, your car, or a savings account on the line. It’s important to calculate your interest rate to have the clearest possible idea of how much this could cost you.
With that in mind, you may want to consider going for an unsecured business loan when the purchases you need to fund are relatively small. That higher interest rate is significantly less painful when it’s being applied to a smaller purchase, which means that it should be less painful to pay back.
3. Remember, though: unsecured business loans are also an option for larger expenses.
In a collateralized business loan, the lender will probably limit their loan to the price and scope of the collateral. You won’t get a $500,000 loan with your $25,000 vehicle offered up as collateral.
When there’s no collateral, you’re able to ask for larger amounts. But asking for such a large amount makes you a risky bet for the lender. Having no collateral available to help a lender recoup any losses they’d take if your business were to fail is a liability, so…
4. Understand that you’ll probably need to repay an unsecured business loan quickly.
Making the repayment period short is another way for the lender to minimize risk on their end. This can mean that you’re making payments on a new loan right after receiving the funds. Be aware that that might lead to cash flow issues.
However, this can also be a benefit for businesses that are growing quickly, as they’re able to quickly repay the loan amount and move forward with other plans or securing new financing.
5. You should improve your personal and business credit scores.
Every apparent disadvantage of unsecured business loans is at least partially mitigated by having a superior credit score. Lending money to a business is essentially an investment by the lender. Your personal credit score and your business’s credit score are both hugely important bits of data that tell lenders how likely you are to provide a positive return on their investment.
So always make sure you’re paying bills on time. Avoid opening too many lines of credit or credit cards. Double and triple-check the credit reports to ensure no errors have been made. Credit scores are extremely important to the life of your business.
After all, a higher credit score will mean lower interest rates, more generous repayment terms, or even more money. Just take a moment to see how much of an impact lower interest rates can have on loan repayment with this Bank of America calculator.
6. Be wary of using an unsecured business loan that could lead to future cash flow problems.
Because interest rates are higher and repayment terms shorter with unsecured loans, it’s important to make sure your unsecured business loan isn’t creating cash flow issues for your company. Will you be able to repay on the terms outlined in the loan? Will the new payments lead to issues with paying invoices, employees, or upgrading equipment?
Remember that funding companies never want you to struggle to meet the repayment terms, especially so if it’s an unsecured loan. Lenders want your business to succeed and make your payments right on time since that’s the best and easiest way for them to get their money back.
7. Don’t be intimidated by how difficult it can seem to get an unsecured business loan.
Some of these loans can be a long, arduous process. SBA loans in particular are notorious for taking a long time to apply for and a long time to hear back with a decision. But stay patient. You’ve done the research into the loan you need. You’ve got a great business plan. You know how you’re going to make those payments.
If you need financing faster, you can always work with a company that can help you get access to funds upfront with less time filling out paperwork and twiddling your thumbs. Start by talking with a company that specializes in unsecured business loans.
8. Know your alternatives.
There are always different ways to secure the funding you need. You can investigate secured loans instead of unsecured loans if you’re not getting the terms or rates that you’re hoping for. There are also different kinds of options available to business owners depending on the type of reason for the loan in the first place. For example, you may want to consider an equipment loan if you’re planning to spend the money on a new piece of hardware. While the lender will consider the new equipment collateral, it may still be a better option for you than putting your house on the line as collateral.
You will also have a personal guarantee in your unsecured business loan. Personal guarantees are negotiable. Some will be unlimited, some will have limits. An unlimited personal guarantee means that if you default on your unsecured loans, your lender will look to you as an individual to repay the loan, seeking any asset you have that could help them recoup. But if you choose a loan that limits your personal guarantee, you set a specific limit on what can be taken if you default (although, of course, limiting the guarantee means a higher interest rate too).
The bottom line on unsecured business loans.
Know how an unsecured loan can help your business take on new challenges with more flexible terms than traditional loans. There are a lot of options to study when it comes to business lending, but unsecured products can be a great option for the savvy business owner who knows how to turn a lender’s investment into great business results.