When launching a small business, many entrepreneurs and businesses do not have the necessary amount of collateral that larger businesses have, which can make it difficult to secure a business loan or credit. However, there are options out there to get started on a small business loan application with no collateral, in the form of unsecured lines of credit.
Unsecured credit are loans or lines of credit where there is no collateral to back the loan. This type of lending is considered risky for lenders, as they have to rely on the cash flow from the business and the personal financial strength of the business borrower. For this reason, entrepreneurs often need to have exceptional credit scores and personal financial statements. Additionally, the business needs to demonstrate strong cash flow, either on a historical and/or projected bases, to service the requested funding.
What types of unsecured credit products are available for small businesses?
Today, unsecured credit can be disbursed through both banks and non-bank lenders. Banks are traditional depository institutions that take in deposits and lend out money to small businesses and consumer. Non-bank lenders do not take in deposits but only concentrate on small business and commercial lending or consumer based lending.
Both bank and non-bank lenders may disburse funds through unsecured business loans, unsecured business lines, unsecured business credit cards, merchant cash advance, and micro-loans as well as several other disbursement options. Business owners should keep an open mind to the product type as lenders may vary in their offerings.
What are the common rates, terms and sizes of unsecured credit loans?
The terms of unsecured credit are generally flexible, as the lender and the small business borrower will typically look to work out a plan that fits the needs of the small business. Lenders and borrowers will work to establish a maximum credit limit, rates, and term, that establishes a repayment plan that reasonably suits the capacity of the small business owner and helps avoid a default.
As with any loan, the rate and term will be dependent upon the overall risk of the transaction. Lenders will analyze or underwrite both the small business and the borrower to determine the overall risk associated with the loan. The term and amortization will also be determined by the lender. The longer term and amortization the smaller the monthly loan payments will be; however a longer term and amortization will come with higher overall cost because you are spreading the interest due on the loan over a longer period of time. Ultimately the overall credit strength, market conditions and specific lenders' policies will dictate interest rates and terms.
Variable rates are more typical for unsecured loans however there are some fixed rate products. Furthermore, since unsecured credit lines are not backed by collateral, the rates can be higher than those of a collateralized loan.
Additionally, the borrower's credit history will have much more weight in the decisions of the lenders, as it is one of the most relevant indicators that the loan will be repaid. Lenders will also look at the financial strength of the business including the cash available to service debt or Debt Service Coverage Ratio and balance sheet liquidity and net worth ratios.
The maximum credit limit for unsecured loans can vary, and will be highly dependent upon the business and borrower's financial history. Entrepreneurs can acquire unsecured loans in the form of a credit card for as little as a $1000, while some lenders will back unsecured credit lines of more than $500,000.
Unsecured vs. secured loans: Which is better for your small business?
Small business owners who are looking to acquire an unsecured loan often do so out of necessity. These loans are highly advantageous for the entrepreneur who needs working capital for a variety of business operation uses. Unsecured loans or lines can be funded very quickly considering the lender will not be underwriting any collateral pledged for the loan.
For that reason unsecured loans can be more expensive as a reflection of the risk the lender is taking on in disbursing the un-collateralized credit. Collateralized loans are perceived by lenders to have less risk because the collateral backing the loan can be viewed as a form of secondary repayment for the loan. Collateral for business loans may include commercial real estate, machinery and equipment, accounts receivables and inventory.
What kind of lenders offer unsecured credit loans?
Most financial institutions that offer secured loans will also offer unsecured credit. In fact, even loan programs guaranteed by the U.S. Small Business Administration (SBA) offer unsecured credit in the form of working capital loans. Some lenders specialize in unsecured loans, while any institution that offers small business loans, business lines for credit or business credit cards will often supply unsecured business loans.
How to improve your chances of approval for unsecured credit loans
Unsecured credit loans can require a full underwriting of the business and the borrowers. For this reason it is important to be prepared when applying for a loan.
There are several items you will want to put together when preparing to apply for this type of loan:
- Business Financial Statements: Lenders will want to understand the ability of the business to repay the loan based on the cash flow from operations. Historical business income statements, tax returns and historical balance sheets will be necessary. For start-up businesses financial projections will be necessary.
- Accounts payable and receivable statements: Lenders will want to see the AR and AP aging schedules for the business. The goal of the lender is to see if your receivables are coming in on time and if payables are being paid on time.
- Business and personal credit reports: It is important to understand your personal credit score. If your score is low your credit report will give you an indication of why. Late payments, high credit limits as well as judgments and bankruptcies will affect your score negatively.
- Personal Tax Returns: Your personal income and personal financial strength may be taken into consideration. Lenders will want to verify your income and may ask for your tax returns or a transcript of you tax returns.
- Business Plan and Projections: Lenders want to see how prepared you are and will want to see a proper business plan as well as financial projections. It is important that you show the lender that you know where your business is going.
Improving your chances of approval
Using BoeFly can substantially increase your chances of obtaining an unsecured credit loan. As the firm has thousands of participating lenders - many of which offer this type of loan - you will get visibility among these institutions through only one loan application. This way, you will be able to gauge which lender is offering you the best terms, rates and more, all before sealing the deal.
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