What you should know about business financing options

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Fortunately, there are many options, including small business loans.

Lenders typically offer secured and unsecured business loans. Yet, there are many reasons why you might prefer to apply for an unsecured business loan. Find out the minimum requirements needed and the benefits of electing to use this financing tool.

What Is An Unsecured Business Loan?
An unsecured business loan is a type of financing that requires no collateral. Most small business loans are backed by a business or personal asset, however. But this means that a lender is much more willing to take a risk on you as your credit history and cash flow indicate that you can manage the debt. Expect to pay a higher price for these types of loans, though.

Where Can You Find Unsecured Business Loans?

Traditional Banks
– Getting approved isn’t easy
– Banks are generally less eager to lend to small business owners, especially for startup funds
– If you have a pre-existing relationship with the bank, your chances of being approved are better

Online Lenders
– Online lenders offer an easier application process and are more amenable to providing short-term unsecured loans
– Loan funds can be used for operating capital, to cover cash flow gaps, meet seasonal expenses and other general operating costs
– Most online lenders don’t require a personal guarantee. They’ll also accept a lower credit score than the bank and process your application quickly

Small Business Association
SBA 7(a) small business loans and SBA express loans $25,000 or less don’t require collateral. If you need startup funds, this program could be a useful resource
– Loans are guaranteed by the government and disbursed through approved lenders, including online small business loans lenders

Unsecured Business Loan Vs. Unsecured Business Line Of Credit
Both types of financing are available without the need to put up collateral. However, there are some differences between them.

Unsecured Business Line of Credit
– This is a type of revolving credit
– The lender establishes the maximum amount you can use
– You only repay what you use and interest is applied only on the amount you withdraw
– As you repay, the line of credit is replenished

Unsecured Business Loan
– You receive the full amount of the loan upfront
– You’re obligated to pay the amount you borrowed
– Interest is applied to the total loan
– Once you’ve repaid the loan, the account is closed

What Are The Minimum Unsecured Business Loan Requirements?
As mentioned, these loans pose a greater risk to the lender. To be approved, you must demonstrate a high probability that you’ll repay the loan in full.

– You need excellent business and personal credit scores
– Your financial history must demonstrate that you pay your bills on time and have repaid previous loans
– A healthy cash flow, proven by detailed current and projection analyses
– Significant business revenue
– Be sure to have a thorough business plan that includes your strengths, marketing efforts, and how you plan to overcome any disruptions in the market
– Some alternative lenders offer revenue-based unsecured business loans. You must meet annual revenue and business history requirements

What Are The Benefits of Unsecured Business Loans?
These loans are more affordable than revolving credit and since they’re term loans, your monthly payments are fixed. Other benefits include:

– Less paperwork is required
– It can take months to evaluate your assets to determine if they have enough value to meet the criteria for collateral. Moreover, you could find yourself in lengthy disputes with the lender’s appraisers
– The turnaround time on your application is quick, and you get your funds within days. If you need capital to take advantage of a short-term purchase or investment opportunity, getting the money fast is critical
– These loans can be discharged in bankruptcy

What Are the Risks of Unsecured Business Loans?
This loan can be a way to get financing quickly, but it comes with risks.

– If you default, there are only a few options to help get out. Typically, the lender will resort to debt collection
– You could be forced to declare bankruptcy
– Even if a loan isn’t secured by assets, the lender can still sue you and your business. Your business bank account can be garnished and a lien can be placed on your business assets
– The interest rate is higher, and the loan term is shorter. This will have a more significant impact on your cash flow

Conclusion
An unsecured business loan is an excellent option when you start a new business or don’t want to use business assets to back the loan. Applying for this loan shortens the time between application and receipt of funds.

On the other hand, there are risks for you and the lender. The risk to the lender is offset by higher interest rates and a shorter loan term. The risk for you is that if you default on the loan, you could still lose your personal assets and suffer a severe blow to your credit score.

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ABOUT THE AUTHOR

Kristina Knight is a freelance writer based in Ohio, United States. She began her career in radio and television broadcasting, focusing her energies on health and business reporting. After six years in the industry, Kristina branched out on her own. Since 2001, her articles have appeared in Family Delegate, Credit Union Business, FaithandValues.com and with Threshold Media.