Unsecured Business Loans

A line of credit is one of the most popular small business loans because it allows companies easy access to cash without having to get another round of funding from a bank or other lender. A line of credit works by giving an entrepreneur a set amount of borrowing capacity within a specified time period, e.g., $25,000 for 12 months. If the business needs more than the initial credit limit for a project, it can apply for another draw of funds.

Since these loans are unsecured (i.e., no collateral is required), they provide some flexibility to small businesses that may not qualify for other types of credits because their balance sheets do not support enough security. For example, if a business has $500,000 in total assets but just $50,000 worth of equity or net asset value, its line of credit will be limited by this modest net asset value; however, since there is no collateral on the loan, banks may consider increasing this amount up to an employee's salary (typically three-to-four times salary).

Unsecured Loan Advantages

The advantage of Unsecured Business Loans is that there are no limits to how much can be borrowed, unlike Secured Business Loans. This gives the borrower more control over the loan process and frees up financial resources for other company needs.

Another advantage of unsecured business loans is that they do not disrupt your credit rating, so if you already have a good credit score, then applying for an unsecured business loan may not impact it negatively (although certain lenders choose to report all their accounts on a monthly basis). Plus, unlike many bank loans, unsecured business loans do not require collateral or guarantees which means that in most cases they do not appear on personal credit history reports.

Unsecured business loans are useful in special circumstances when the borrower has an insufficient net worth for a traditional bank loan. Unsecured business loans are especially beneficial when the business is short on cash but has valuable assets that can be offered as collateral to obtain a traditional bank loan.

Unsecured Loan Disadvantages

The disadvantages of unsecured business loans include their shorter terms, higher interest rates, and few available funding options at any given time. Unlike other types of credit lines, unsecured business loans require borrowers to undergo thorough financial examinations which can take months so if you want fast cash to start or expand your small company, then this may not be the right type of financing for you.

Also because these loans are considered high risk by lenders, they typically have much higher interest than secured loans (i.e., loans that are backed by a piece of collateral such as a car, boat, equipment, or business building).

If you're in the market to borrow money and want to apply for an unsecured business loan, it's important to distinguish between factoring companies and traditional lenders. Lenders will only give you funds if they receive your signed agreement, so unless you have the appropriate paperwork prepared and ready to go when applying online, your application may be rejected. That is where factoring companies come in because their goal is simply to advance your funds based on an approved purchase order from your customer -- no additional paperwork is required beyond what your company already has on file with its own customers.

Your Credit Matters

Overall operating costs can affect a small business's ability to borrow. This includes not only how much it costs to get the loan (which may include points, fees, and other upfront financial obligations), but also ongoing monthly debt service requirements, which are typically expressed as a percentage of the average daily balance due.

The borrower's ability to repay is directly related to its operating cash flow or turnover cycles in receivables for creditworthy borrowers. The lender looks at both personal and business credit scores when underwriting loans. If you have good personal credit, then your chances of being approved for a small business loan are fairly high. On the other hand, if your personal credit score does not meet the bank's qualifications, then there are options available that don't require you to guarantee against your home and you'll still be able to secure a business loan.

Many banks don't offer loans for new businesses or start-ups, but there are many other types of lenders that do. The trick is knowing where to find these lenders and who can best suit your business needs.

By understanding the various elements of an unsecured business loan you will be better prepared to make important decisions regarding which lender is right for your company. Understanding one's options when it comes to borrowing money for the success of your small business is critical in today's tough economic times. These guidelines should put you on track toward finding the loan program that works well with your budget and financial situation so that you can meet all the challenges ahead in growing your business.

If you need fast cash to start or expand your small company, then an unsecured business loan may be the right type of financing for you. To distinguish between factoring companies and traditional lenders, lenders will only give you funds if they receive your signed agreement, so unless you have the appropriate paperwork prepared and ready to go when applying online, your application may be rejected. That is where factoring companies come in because their goal is simply to advance funds based on an approved purchase order from a customer, no additional paperwork required beyond what's on file with its own customers. 

Conclusion

If you've never borrowed before it can be quite intimidating to look at all of your options and determine which one best suits your business needs. We hope the following information will help you understand what unsecured business loans are, who offers them and why they might be right for your financial situation. By understanding the various elements of an unsecured business loan you will be better prepared to make important decisions regarding which lender is right for your company. one's options when it comes to borrowing money for the success of your small business is critical in today's tough economic times.