Unsecured business loans are the type that are not supported by any collateral. To decide whether or not you’re an excellent candidate for an unsecured business loan, the bank will inspect elements such as your credit history, time in business, profits and last but not the least your business plan.
This is exactly opposite to a secured business loan, which requires the business owner/borrower to use their valuable assets as collateral. With a secured business loan, business owners with a bad or no credit can have an easier time getting approved. However, they should also have the necessary assets to use as collateral to secure a loan.
There are lots of structures that are used to arrange unsecured business loans. For instance, a revolving line of credit allows the business borrower to keep drawing cash up to a certain limit from the bank, as long as the borrower makes payments as per the schedule. A traditional non-revolving loan provides the small business owner a flat amount, which he should pay back in small chunks.
Advantages and Disadvantages Of Unsecured Business Loans
As with any other funding program, there are also some perks and drawbacks of unsecured business loans. Therefore, you need to be very careful when picking up any loan program.
Advantages of Unsecured Business Loans
The leading advantage of getting an unsecured business loan is the simple fact that it doesn’t require collateral. Small business owners are frequently cautious to use the collateral to secure loans, fearing that it could harm them later in the future. In case you are unable to pay back a secured business loan, for example, the bank might also take the possession of the assets that is used as collateral in the business funding process. This isn’t an issue with unsecured business loans, as there is no collateral used to secure them.
Disadvantages of Unsecured Business Loans
However, getting an unsecured business loan can be quite difficult when you have bad or no credit problems. New businesses usually lack the creditworthiness of their established counterparts. And without a solid credit history, banks may be unwilling to issue an unsecured business loan. With that said, there are ways for new businesses to build their credit. This will increase the odds of getting approved for an unsecured business loan.
Types of Unsecured Business Loans
There are three major types of unsecured business loans;
Short Term Business Loans
Short term business loans have quicker funding time and higher APRs as compared to traditional business loans. Normally, you can get a short-term loan within 2-3 days, but the loan will regularly have an APR around 40%. This may not suggest it is necessarily a more expensive funding option than other types of loan programs, even though, due to the fact that these loans are especially designed to be paid back quickly. In case you pay off these loans within a few months, the total cost of capital may be lower than a traditional, longer-term loan.
Accounts Receivables Financing
Accounts receivables financing is often referred to as invoice factoring or accounts receivable financing. It is a funding option that allows businesses acquire lump sum payments now in exchange for the value of invoices that are due in the future (generally within 90 days). It is a great option for businesses that invoice customers and are looking to overcome short term cash flow gaps. These lenders use your invoices as collateral in preference to different personal or business assets.
Merchant Cash Advance (MCA)
A merchant or business cash advance helps businesses get lump sums of financing in exchange for a fixed share of their daily credit and debit card receivables. Cash advances are expensive, with APRs starting from approximately 30-130%. One advantage of a cash advance is that your payment every day is primarily based off of what you make. So you will not be stuck with a fixed monthly or weekly payment no matter how much revenue you bring in.