Unsecured Lines of Credit – What to Know
Could your business use an unsecured loan? When you decided to start your small business instead of working for someone else, you knew that you were taking a brave but risky step. Not only did you have to start at the proverbial ground zero, but you also may have started with little experience in running a business, and definitely didn’t have a consistent cash flow. But those are all risks that you were willing to take. It truly does take some time for a business to begin to generate some income, for the ups and downs to stabilize, and for you to analyze the ebb and flow of income. There is never any guarantee that a profit will be obtained or that your business will ever make a name for itself. If you are starting a business or planning to, and are looking towards securing a loan, you should be familiar with the pros and cons of obtaining a secured business loan vs. an unsecured loan.
Do you need to make business purchase, increase working capital or just need a line of credit as a safety net? As the owner of a brand new or growing your business, you will have many loan options available for your business financing needs. There are two main types of business loans, loans that are secured (by your assets) and ones that are unsecured. Lenders who offer unsecured business loans won’t require your business to put up any assets as collateral to obtain the loan. That means there’s no risk to existing assets like a home, vehicles, other commercial property, or long-term assets like a 401k or IRA. However, you must still meet income and credit requirements. Unsecured business loans can range from $5, 000 to more than $500, 000, depending on the size of the business and its credit rating. Some lenders may also offer businesses a revolving line of unsecured credit.
The small business loan will be based mainly on the credit history of the applicant. Sometimes these loans are also known as ‘signature loans’ because the bank has nothing but your credit history and your signature. Plus your personal assets cannot be repossessed, a great advantage for you for this kind of loan.
An unsecured small business loan can be both a blessing and a curse. If you can get your loan from a reputable lender, your business is likely in good financial shape. But, don’t abide by the terms of your loan, and the debt you incur can end up hurting your business and credit in the long run.
Pros of an Unsecured Loan
Unsecured financing can offer you higher loan amounts, yes; you read that correctly – higher loan amounts. Secured business funding is often limited by a percentage of value of the assets used to secure it. Unsecured business funding does not have this limitation, thus the funding amounts can be higher. An unsecured loan is also funded faster. Secured business funding usually requires an appraisal of the assets used to secure the funding. Unsecured business funding skips this appraisal step thus can often fund faster. In fact, with some lenders funding can often be obtained within 72 hours of application. And, believe it or not, unsecured financing can be easier to obtain. It may sounds like an oxymoron, but it truly is easier to get. This type of loan requires less paperwork, less documentation, and causes fewer headaches than secured business funding.
Unsecured lines of credit can offer a business additional flexibility. Could you imagine having extra cash on hand when you need it? Especially when that cash that is not leveraged against your assets? How great would that be! This offers almost unlimited flexibility for a growing business. You can use that extra money to purchase that new server you need, cover payroll in a slow month, pay your accounts receivable or make improvements to your property that will bring more customers in the door. The most effective type of unsecured loan is a working capital line of credit. With a line of credit, you can borrow money when times are tight, pay it back in the big months, and then borrow it again as you need it. It can provide you flexibility for the life your loan!
Unsecured loans can help you build a relationship with a lender. Every business would like to have a lender on their side, knowing that if they need a loan, this lender would be willing to give them one. In business, a solid relationship with a lender will always make it easier to obtain financing down the line. Often times businesses are granted these loans either because you already have a strong history with that lender or your business has a good reputation and strong financial position. If you are working off reputation, you can really make a good impression on the lender by properly handling your unsecured debt. Do this and you can find future financing requests pushed through more quickly and easily.
Cons of an Unsecured Loan
On the con side is liability. Even though your loan is not leveraged against your assets, it is still a liability. This means you have to make your payments each month without fail. Since you do not have collateral to back up the loan, the lender will be on top of you if you miss a payment. You may not get many “chances” if you start to become slow or delinquent on your payments. If you don’t pay, the bank doesn’t get anything in return, so it is likely to find a quick and easy way to drop your business as a client, and send you to collections for the rest.
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