An unsecured loan is a type of business financing that doesn’t require a borrower to place a prime asset, which includes business vehicles, real estate, or expensive business equipment as collateral to acquire the loan. Business loans that do require collateral are known as secured loans. It is important to understand that in case a borrower defaults on an unsecured business loan, the lender will seize the resources to recover their losses.
What Are The Difference Between Collateral And Personal Guarantees?
While some business loans don’t require collateral, it is important to understand what these lenders need in exchange. In general, if you are not setting up any collateral, you will be requested to sign a personal guarantee.
Based on the type of personal guarantee you sign, the lender could sue you personally after that grab your resource to cover the borrowed amount, interest, and even the legal charges. Even in case your business is a Corporation, Limited Liability Company, or other type of business that protects your personal resources, the terms of the personal guarantee could nullify that protection.
Unexpectedly, the concept of placing up collateral sounds attractive. Generally, in case you can likely place collateral, it’s satisfactory to do so.
Business Loan Programs That Don’t Require Collateral
However what in case you don’t own a home, you’ve invested all of your savings into your business, and your business has no asset or resources appropriate to serve as collateral?
You can consider these small business funding options if you don’t have any asset or resource to place as collateral for a loan:
- Peer-To-Peer Lending
Peer-to-peer or P2P lenders normally match the people looking to borrow with people looking to lend. There are websites that specialize in business loans and others that provide personal loans that don’t require collateral.
- Merchant Cash Advance
A merchant cash advance presents an advance on your future credit card sales. This is not a loan and the advance amount is repaid automatically by drawing a percentage of your credit card sales out of your bank account on a daily basis.
- LINE OF CREDIT
There are some business lines of credit that do not require collateral. However, unsecured lines of credit normally require a robust personal credit rating, and previous performance of business success and high annual sales.
- BUSINESS CREDIT CARD
Unsecured business credit cards can provide an alternative to placing collateral if the amount of cash you actually require is small.
What Are The Benefits Of An Unsecured Business Loan?
The business doesn’t need to risk any of their personal or business asset, nor does the business require collateral absolutely to get approved for business funding. Now, just because of the fact that a business may not require collateral to get a loan, that doesn’t imply that a business will not be liable should the business default as, generally, a blanket lien is issued once the unsecured business loan is funded. In case the borrowed amount isn’t paid back, the lender will still be able to come after all business resources that a business may have.
Applying for An Unsecured Business Loan
Since everyone knows that the unsecured business loan involves a higher risk for the lender, lenders usually focus on credit rating and business’ overall performance. Every lender have different lending criteria they look for, however they usually remember things like how long you have been in business, your business revenue, your personal and business credit rating as well as your business plan.