What are unsecured business loans?
Unsecured business loans are loans in which no collateral is required. Many loan types require some form of property of value to be pledged against a loan. Typically, lenders will provide much lower interest rates and a higher funding amount when the loan is backed with something of value which can be recovered if the loan is defaulted on. This eliminates some risk associated with loans.
There are some advantages and disadvantages to unsecured business loans. It’s important to calculate how much money you need and what you need the funds for before committing to any loan type. If you are a new business without much capital, do you assets or no assets, and even poor credit, then you will likely have fewer options. If you are like most business owners, you will need additional capital to get your ideas off the ground. Do your research and find the best bone type that makes the most sense for your financial needs.
Putting up collateral including your home or other property to fund your business, this puts a huge risk on your personal finances. You will want to eliminate these risks as much as possible. If you can secure the funds you need with only your business credit, that would be an ideal situation. Many businesses struggle to stay afloat and half of them end up going out of business within five years. That’s not to say that an unsecured business loan relieves you of all liability to pay back the loan. Lenders will still have to seek payback of the loan by any means necessary.
What are the advantages of unsecured business loans?
No Collateral
One of the most obvious advantages to unsecured business loans is you do not need to put up any collateral. You are not risking any of your personal assets or business assets. You are putting almost all the risk of the loan on the lender.
Borrow More
However, one of the less obvious reasons for taking out an unsecured business loan is typically you can borrow more money on average. In secure financing the loan amount cannot exceed the value of your collateral. Therefore, there are limits to how much you can borrow with secured debt. Since this is the case, when borrowing with an unsecured loan there may be higher limits as to how much you can borrow. Usually lenders look at your business revenue to determine how much money they are willing to offer. If you are business can show most consistent revenue you will likely be approved for a much larger amount.
Quick Approval
Another advantage of unsecured business loans is the approval process tends to be much quicker. While most secured loans and take 3 to 4 weeks to process, most unsecured business loans can be approved within 48 to 72 hours. Obviously, these processing times depend on the lender. With an unsecured business loan funds can be wired into your business account within two to five business days on average. This is simply not possible with a secured business loan which will require an inspection of the asset and appraisal of its value.
Along the same lines the application process for an unsecured business loan is usually much easier. Most lenders can approve your loan application with a simple one-page app. In addition to the one-page application you will also be required to provide 3 to 6 months bank statement and possibly most recent tax return for your business.
Flexible Use of Funds
The flexibility and how you use the funds with an unsecured loan is another advantage to this loan type. With secured Lending you are limited to how you may use the funds, and oftentimes the lender will pay the merchant directly and hold the note until it is paid off. Therefore, once the loan has been accepted the borrower has few or no options.
With an unsecured loan, however, the loan is provided as cash wired directly into the business bank account and can be used for anything related to the business. The business owner has full discretion on how to utilize the funds and payback the loan. Unsecured loans can be used for many business needs, bike purchasing new equipment, renovations, payroll, inventory, materials and much more. This puts the power in the hands of the business to do what is in their best interest.
Poor Credit Approved
Although there are many more advanced to using unsecured business loans for your business, the last advantage we would like to point out here is poor credit forgiveness. Lenders can be all over the map when it comes to credit but there are many options for business owners with poor credit. Since unsecured business loans are approved primarily on the basis of revenue, credit is only a minor factor in the approval process. Every lender has its own minimum requirements, make sure to do all the research before making any decisions for your business.
Are there disadvantages to unsecured business loans?
Higher Interest Rates
The most important disadvantage of unsecured business line is the fact that interest rates tend to be a lot higher than secured business loans. This is because it makes the loan much more risky for the lender. There is nothing for the bank to recover if the loan is not paid back. Rates vary from lender to lender so it’s important to do as much research as possible and get as many quotes as you can before signing any agreement.
With everything in life there are pros and cons. So while on one hand unsecured loans are much easier to get I don’t need any collateral, be prepared to pay more for this convenience.
Shorter-Terms
Another way of lenders offset the risk of providing funds to businesses without any collateral, unsecured business loan terms tend to be much shorter. On average these loans range from 12 to 18 months payback. Conversely, secured business lines can be financed over many years. Unsecured business loans can be useful if you need the money for a short period. If you are looking for funds to be paid back over 5 to 10 years then you will need to put up some collateral.
Review the terms of any loan agreement before signing. Do the math on what your actual interest rate will be, what the cost of funds will be, then look at your ROI. If the math makes sense and you will make enough money to pay back the loan and have money left over then it will be a good option for you. Otherwise, it may be a good idea to look into other options including secured funding.
Aggressive Payback Terms
If you end up taking out an unsecured business loan, often you will need to pay that back rapidly. Many of the programs require daily or weekly payments through ACH. Only after a couple days of having the funds in your account the payback will usually start right away. This leaves only a small window to utilize the full amount of the loan because once you start paying it back you will no longer have access to those funds.
If your business has plenty of revenue to show, there are still options where you could get into a monthly recurring payment. However, that is the exception not the rule. To get an approval lenders will look through your bank statements to make sure your cash flow can support the payback structure. Some businesses actually enjoy the small micro payments throughout the month instead of a large payment once a month.
Lenders utilize this structure of daily payments because it is much less likely that the payment will be declined when it is just a small payment. Larger ACH payments have a higher rate of being declined. If you have a good bookkeeper you’ll use the funds and none of the payments without much burden.
What are the options for Unsecured Business Loans?
Short-Term Loan
The most common unsecured business loan is a short-term loan. Most lenders want to keep terms short because it is less likely that’s a lawn will be defaulted on in the short period. It gives business owners less opportunity to fail in their business or simply walk away. Keep in mind that business funding is one of the most risky types of lending there is. Anything a bank or lending institution can do to mitigate those risks will be done.
There are options to take out more money halfway through the loan. In that regard it can operate like a line of credit, whereas you are only paying interest on the money you take out. If you are business flips inventory on a regular basis, then the short-term will work to your advantage. If your business has short-term projects, completed within a few months, then it may make sense for you. The shorter-term will keep interest lower than it would otherwise be.
Short-term can be as short as 3 months or as long as 36 months. Depending on the program you are approved for a finance consultant will help you determine the best program to fit your needs. If your business is not in this position to pay back the lawn (quickly) than a working capital loan may not be the right solution for you. Unsecured business loans are for those who can turn a profit with the increased capital quickly.
Unsecured Line of Credit
One of the most sought-after forms of unsecured business loans is the unsecured line of credit. If your business can show consistent revenue and you have great personal and business credit, then this may be an option for you. Many businesses doing millions a year in gross revenue are able to get a line the bank that is not secured with any asset. Typically businesses who do not need the money are those who qualify for this type of funding. An unsecured credit line will come from the bank and take weeks or months just to get an approval. Furthermore, the banks are only approving about 1 out of 10 applications. So these are not very common.
One of the downsides to the unsecured line of credit is that there is a limit on how much a business will be qualified for. Although the funds are provided at a very low interest rate considering the fact that there are no assets securing the loan, there may be limits on how the funds can be used. Oftentimes businesses who are in need of funding cannot solely use v on secured line of credit. In addition to this credit line they will seek working capital through other means, which can be used for anything as it is cash wired into the business bank account.
If you have the revenue and the credit to get approved for an unsecured line of credit this will be an ideal option for your business. You will only be charged interest the money used.
Merchant Cash Advance
A merchant cash advance is a less common blending type for businesses than it used to be. A merchant cash advance is primarily a loan option available for retail businesses are those who do large volumes with credit card processing. The funding amount will be determined by the amount of revenue coming into the business via credit cards and how often the business receives payment in this form. This used to be one of the primary lending options for businesses outside of the bank. However, recent time more options have been developed and are now available many types of businesses and revenue models.
To be approved for such a loan you will need to provide your merchant statements along with your bank statements. There will be more scrutiny involved in the process but lenders like to see many transactions on a regular basis. The more often you are paid as a business the less risk there is in the loan. Payback of these loans are typically daily or weekly drawers from your account. Micro payments, which are set out throughout the month. Many retailers find the micro-payments often go unnoticed in relation to the amount of Revenue brought in by the business each day.
Personal Loan For Your Business
Another way to secure funds for your business is not the most recommended option. Taking out a personal loan for your business puts the risk on your personal credit and finances. If you believe in your business, then that may not be such a bad idea. However, given the fact that most businesses fail it’s probably not a good idea to put your personal financial future in jeopardy. It would be wise to avoid using a personal loan for your business at all cost unless you simply have no other options.
However, how many lenders who will provide personal funding if you have good credit. You’re welcome to use the funds to start a business or find your current business. You may find that the terms of the loan are much better than those provided for businesses. This is because there is more leverage the lenders have in getting their money back if something goes wrong. Personal loans are generally less risky than those for business. The Lending amount will typically be much lower than a business loan but if it is the only option you have then there’s not much to argue about.
Does Flex Capital Unsecured Business Loans?
Yes, Flex Capital primarily specializes and unsecured business loans. We work with businesses all across the country with varying Revenue models from different industries. You can apply online 10 minutes and get approval within 24 hours. Once you have an approval it will be available for the next 30 days. Get started with the application process now or give us a call to find out more information. We are ready to speak with you about your business and help you find the right program for you. Depending on the need you have and your business time we will find a program that fits your model.
We are more than a finance company. We were founded by entrepreneurs and find great pride and helping businesses grow with additional capital. Our account executives go beyond loan terms and are capable of providing financial and business advice. We want to learn more about how your business works and how you plan to get a return on investment. Let us help you take your business to the next level.
