Every small business owner gets into a situation where borrowing money is the only way to keep pushing forward. The choices to borrow now in the 21st century are endless, from borrowing from family to securing a business credit card, or even more traditional means like an SBA loan all come into question. When traditional lending means is inquired upon two specific products come into question: a secured business loan and an unsecured business loan. These 2 types of loans each have their own requirements, fit specific businesses, and bring along their own separate advantages and disadvantages.
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What is an Unsecured Business Loan
When looking at different financing options it is of utmost importance to know the difference between all of your available financing products. Look closely at all of the options and pick the one that fits your needs. Below we explain everything you need to know about an unsecured business loan and a secured business loan. As mentioned previous times before, make sure you do your own research before allowing someone else being in your ear providing you with their opinions.
An unsecured business loan is a financing option in which zero collateral is requested. This form of business loan is qualified solely dependant on past credit history of the borrower. In today’s day and age, finding a true unsecured business loan is few and far between, especially for larger funding amounts. Banks are reducing the amount of loans they are lending to small businesses more than ever. Most business owners’ first choice when thinking about loans are institutionalized, traditional banking sources. While these sources may offer an unsecured business loan or unsecured business line of credit to top qualifying borrowers, most of these traditional bank sources typically require collateral or some other form of guarantee.
The Difference: Specific Collateral vs A Lien on Business Assets
Traditional lending sources generally use collateral to secure themselves with lending funds to any business. Traditional lenders will look at assets that you own either real estate, business equipment, or other tangible business assets that carry strong value. The lender will proceed to assess the property or equipment in order to determine the loan-to-value ratio of the asset in order to finalize pricing. Typically, we are seeing lenders borrow against seventy percent of assessed value on real estate properties and sixty to eighty percent of ready-to-go inventory. Each different lender that you speak to has their own algorithm determining the loan-to-value ratio. Ask whichever potential lender how the value is set so that you may provide yourself with the best chance of securing your capital.
Alternative lenders, like many online lenders you see today, do not require collateral, in most cases, but rather execute a business lien on business assets along with a personal guarantee in order to secure the loan that you are seeking. This allows small business owners to qualify for more types of financing products because without a typical form of collateral, the lender is being secured through the lien. Loans that do not require collateral, but require a lien tend to cost slightly largely due to the higher assessed risk involved. With this in mind, here are some benefits to unsecured small business loans that you should keep in consideration:
- Online lenders are changing the alternative lending space and fixing all of the problems most small businesses face when it comes to lending. The speed to funding now is next to none when applying for a traditional form of loan can take 30 to 60 days. With online alternative lenders, quick application processes, and even quicker approval times have become the new standard. Once small business owners are approved for their unsecured small business loan funds are deposited into the business banking account within 48 hours. Nowhere else will you find quick, efficient capital online!
- Total loan amount is not determined by the value of your collateral! Different to loans from bank sources, unsecured business loans are qualified dependant upon the health of your business credit profile, cashflow observed when underwritten, as well as time of length in business and other determining factors. In many cases, small business owners qualify for a larger amount of capital than they normally would with a collateralized option.
Make sure you ask your lending source if they report your payments to the crediting bureaus. This can work in your favor over the term length of the loan, if you make payments on time these payments will help bolster your credit score. Along with this, if payments are reported, this also shows that you have an increased credit amount and all lenders feel secure if proper credit history is observed. All and all, unsecured lending options are not required to have collateral securing them and this alone has many people thinking of new age ways of lending that is emerging for small business owners nationwide.
Unsecured Business Loan or Secured Business Loan?
Have you secured yourself a business line of credit, or a business credit card? If you have already secured or tried to secure one of these options, the next option may be securing an unsecured business loan. Financing option details all vary from lender to lender but you can expect to see different debt structures, different payback schedules, and different forms of qualifying. Before getting too far ahead, if you are a small business owner you need to initially determine which is right for you, an unsecured business loan or a secured business loan.
Secured Business Loan
Secured business loans, or asset backed loans, are collateralized being secured by tangible, business assets. These assets range and vary from commercial properties, to buildings, to equipment. If default occurs (default- failing to pay back on financing) the small business owner loses the asset that was put up for the funds and the lender becomes the legal owner of the asset. Typical forms of collateral seen, but not limited to, future receivables, inventory, business equipment, personal equipment, business buildings and sometimes liens on your business.
Business owners choose this option to limit personal risk involved with the investment, business owners may seek lower interest rates or even the owner has not proven sufficient credit history with making repayments over longer term lengths. The pros and cons of secured business loans are bountiful. A large pro for secured business loans are banks are more lenient and gracious with the terms and rates because their investment is secured, or backed. Business owners requiring larger dollar amounts, usually because of buying real estate, have sometimes over 30 years to repay these loans. Since the assessed risk with secured loans are lower, there is more room for error (aka missed payments etc.). A large con presented with secured business loans is that they are limited to the value of their assessed asset put up for collateral. With secured business loans, the business owner is putting a possession up for legal repercussion and if you do not repay the loan you will lose the asset put up for collateral.
Unsecured Business Loan
In many instances small business owners do not feel comfortable with putting up business assets as collateral in order to receive a loan. Businesses in this case would have to rely on a strong aggregate credit score in order to secure the funds that they are seeking. In this instance an unsecured business loan is the option to proceed with. Unsecured business loans are not backed by collateral but do require other types of guarantee. This type of financing, due to being higher risk to the lender, comes at a slightly larger cost. In this situation, if default occurs, there are no assets to take in turn for payment. Unsecured business loans tend to have higher interest rates and the qualification process is generally less stringent. Banks can even require a different form of security instead of collateral – like to purchase your future sales receivables.
Unlike secured business loans, unsecured business loan does not have the restrictions of only receiving funds of equivalent value of your collateralized asset. Not only does this allow you to receive the most funds that your business deserves but this also cuts the time to funding in half. Upon bankruptcy on a secured business loan, you are not left helpless, forgiveness sometimes occurs. Cons of unsecured business loans include, but are not limited to, higher interest rates, shorter term lengths, increased qualification standards and having a heavy credit related aspect. The source lending the funds will require lengthy time in business, strong cash flow, and a sufficient aggregate credit profile. In the case of a default on an unsecured business loan, damaged credit plus a myriad of other negative proceedings will occur.
Secured Business Loan Incentives
A large incentive with secured business loans is that the interest paid on the principle amount can be written-off as tax deductible. With an unsecured business loan a small business owner cannot write off the interest paid on the principle lent amount for tax saving reasons.
When you have a secured loan, it is possible to write-off interest that is associated with the loan. This would be true if the loan is secured by your primary home. But you are then putting your home at risk if you can’t make payments on the loan. With an unsecured business loan, you cannot write off the interest because it is not collateralized. This prevents any of your assets from being at risk.
Continue to learn all that you can about your small business and finance needs. Figure out the proper source, your proper rate, term lengths and product types available to you so that you find exactly what fits your needs. Before applying we suggest doing everything you can to apply with a good credit score, doing your research, and knowing what is available on the market. This will allow you to secure the best financing option for your business.
AMP Advance is a Miami based industry leading direct funding source out of Coconut Grove, Florida. We help those who are in need of small business financing by providing web based financing options & funding solutions. Our solutions assist small business owners find matching opportunities while assisting small business owners improve their overall financial situations. AMP Advance provides small business loans, business lines of credit, accounts receivable financing, equipment financing, unsecured business loans, and revenue based loans to millions of small business owners nationwide.