As a small business owner, if you’re in the startup phase or are ready to scale your existing business, you may be searching for unsecured business funding to grow your company.
In a nutshell, unsecured funding does not require you to pledge collateral, whereas secured funding requires you to pledge valuable assets that you or your business own. Typically, assets such as real estate, inventory and equipment are used for secure funding.
An unsecured business loan or line of credit is issued and supported by the owner’s creditworthiness, rather than by any form of collateral. For this type of funding, a small business owner must have good personal credit to be approved. The clear advantage is a business owner avoids the risk of putting valuable assets on the line for funding. However, a lender may make up for their increased risk by charging a higher interest rate.
There are two types of unsecured business funding options to consider, a business loan and a business line of credit. Each has its own advantage.
Although an unsecured loan for the business is not backed by collateral, many lenders will require a personal guarantee. A personal guarantee is a promise made by an individual to accept responsibility for the business’ debt if it fails to pay.
However, certain alternative lenders offer revenue-based loans with no personal guarantee for businesses that meet specific annual revenue requirements and time in business. Funding typically comes through in a matter of days with repayment timeframes much shorter than a traditional business loan.
Unsecured business loans are likely to carry a higher interest rate than a secured loan. A small business owner’s ability to qualify directly depends on their credit profile or the business’ revenue.
As a small business owner, there are a variety of unsecured business loan options to choose from. Traditional bank loans are a popular option, but getting an unsecured business loan from a bank is not easy. Take the time to explore your financing options through the SBA’s learning center.
Business Line of Credit
An unsecured business line of credit is a great option if your business needs access to cash on demand. Business owners want access to funds whenever they need it, at a competitive rate and with flexible payment options. The National Federation of Independent Businesses says, “Think of it as an insurance policy that never needs to be paid until you need it.”
To qualify for an unsecured business line of credit, you should have favorable credit scores, a well-established personal credit history and low overall credit utilization ratio. You also do not want excessive hard inquiries in the past six months.
A traditional business line of credit from a bank has a much more rigorous approval process compared to getting a business credit card. What makes a traditional credit line more favorable is the lower interest rates and no cash advance charges.
If you or your business has assets such as real estate, equipment or valuable inventory you may be able to use those assets as collateral for business funding and obtain lower interest rates.
But if you or your business does not have owned assets to offer, consider one or a combination of the unsecured business funding options listed above. Remember, lenders focus on minimizing risk and protecting their investment in case a business can’t repay its debts. They reduce that risk with collateral, a personal guarantee or a business lien. The more you have to show that your business is a reliable borrower and has the ability to repay, the better.
Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, About.com and All Business.com. His articles and blog; Business Credit Blogger.com, have been featured in ‘Fox Small Business’,’American Express Small Business’, ‘Business Week’, ‘The Washington Post’, ‘The New York Times’, ‘The San Francisco Tribune’,‘Alltop’, and ‘Entrepreneur Connect’.