Unsecured Business Loans are for start ups & established companies. They’re difficult to get & very mis-understood. Let’s answer some of your questions.
What are Unsecured Business Loans?
Simply put, an unsecured business loan is a loan for your business, in your business’s name and, most importantly, it’s a loan that’s originated and issued without any collateral being pledged by the borrower. They are sometimes referred to as signature loans. They are normally issued by banks and it’s important to note that most businesses that advertise online for offering “unsecured business loans” actually do not issue their loans without collateral. This is because many of these so-called “unsecured” business loans come with UCC filings. A UCC filing is a lien against a business. This is a form of collateral. Read what Dun & Bradstreet has to say about it here.
Why would I want an Unsecured Business Loan?
Perhaps this is obvious but there are a few reasons why you would want an unsecured business loan. The main reason you would look for a loan like this is because you need funding to start, build, or grow your business. I’m a firm believer that debt (any loan or line of credit is a form of debt funding) should be used for Revenue Generating Activities – we call it RGA. Think about it. If you borrow money and then you do not use that funding to generate additional revenue then you’ve added debt to your balance sheet without any additional revenue. They other advantage is that you may not have any collateral so this is a way of obtaining funding when you do not have collateral to tie up or pledge to a lender. Additionally, many people have collateral but why pledge it if you don’t have to?
Are Unsecured Business Loans for me and my business?
Unsecured Business Loans, in most cases, are beneficial to small business owners. Keep in mind a few things. Loans tend to be best suited for long term debt purposes. Loans are very different than lines of credit. Loans will have higher monthly payments than lines of credit. Loans are usually going to have higher interest rates but they will normally be fixed whereas lines of credit normally have lower interest rates but they are variable rates. Loan funding can only be used once and then if you need additional funding you’ll need to apply again, hopefully get approved for another loan, and you’ll incur another set of loan closing costs. Lines of credit can be used over and over again without a need for re-applying for additional funding and there’s little or no closing costs. Another notable and obvious difference between loans and lines of credit is that you’ll be making the full monthly payment on loans from day one whether you’re using the funds or not. On the other hand, with lines of credit you’ll only be making payments on the portion of the funding that you’ve drawn or used so the monthly payments and cash flow benefits are clearly on the side of lines of credit. More about these differences can be found on the Lendio Blog.
Another difference and mistake we’ve seen commonly made by business owners is that they treat loans and lines of credit the same from an acquisition and a management perspective. In other words, you would normally not want to get a loan until you need it. In other words if you’re buying equipment or a vehicle or something else where a loan and long-term debt makes sense then you obviously wouldn’t get the that loan until you were ready to buy the vehicle/equipment and use it. It wouldn’t make sense to get the loan and make payments for 3-6 months before you could use the equipment or the vehicle. On the other hand, lines of credit are great for working capital purposes, short term capital needs, marketing, surprises, and many other needs a business faces. Unlike loans, you would want to get your lines of credit before you need them. Have them in place and you’ll surely need them. Ask 10 business owners who have had lines of credit available to them for at least a year if they’ve used them anytime in the last 12 months. Then ask them if the funding came in handy and are they glad they had them available to use as needed. Then let me know if more than 1 or 2 of them tell you that they didn’t use them and found them unnecessary.
Lastly, you want to manage a line of credit differently than a fixed-rate loan. Although it’s not a good idea you’re usually going to be able to get away with a late payment or some late payments if you’ve got a loan. You may pay a late fee but your rate doesn’t change and you can’t “lose” a loan once it’s closed. However, if you pay your lines of credit a day or two late then that lower, variable rate may get increased and if you do it too often then there’s a good chance the lender will reduce your credit line or close it altogether. So don’t manage your unsecured business loans and your business lines of credit the same way.
Unsecured business loans are like a lot of other lending solutions. They can be great for the right person and for the right purpose. One last important note is this. I hope you are successful in your due diligence efforts to find the funding you need but just remember that the internet is a blessing and a curse. I say this because you’ll find every imaginable opinion on this topic and there’s a lot of writers, bloggers, etc. that will tell you this and tell you that. I say do it this way. He says do it that way and the next guy says you should do something else. As you do this just be sure to consider the source. For example, our organization does thousands of applications with hundreds of different lenders every year for unsecured solutions for small business owners. If someone who only knows this in theory or who has done 10 or 20 of these then it doesn’t mean they don’t know what they’re doing but don’t listen to someone who doesn’t have much experience with the subject matter. Additionally, I personally get nervous when I look at websites and don’t see names, pictures, and physical addresses that are real and verifiable. Listen to people who know what they’re talking about and are real and isn’t afraid to tell you who he/she is, what they look like, and where they can be found.