Are you trying to grow your business? Perhaps your equipment has seen its last days and needs to be replaced? Or, are you restructuring your business? If you answered yes to any of these questions, chances are you’re seeking financing for your business. These are simply a few examples, there are a million and one reasons why a business might need financing. Every business will have a reason to use financing at some point.
One choice you’ll need to consider is whether to use unsecured or secured business financing. Both of these options have their pros and cons, the option you choose depends on your business’ needs and objectives. Small businesses and start-ups tend to turn to unsecured financing because they don’t have many assets to pledge as collateral yet. Mature businesses might not have assets to use as collateral either if their business doesn’t involve the use of valuable assets, such as intellectual-based companies.
Regardless, financing without collateral is beneficial for many businesses, but can also end up hurting you and your business if you aren’t careful. Before making a decision, it’s important to understand how unsecured financing works, the advantages and disadvantages and the types available to you.
No Collateral Business Financing
Financing that doesn’t involve collateral, also known as security, is known as unsecured financing. As you can probably imagine, this type of financing is a lot riskier for lenders when compared to secured financing. With secured financing, the lender can seize the asset pledged as collateral, sell it and use the proceeds as repayment. This is not an option with unsecured financing. For this reason, the lender will typically charge a higher interest rate to account for the greater risk.
Lenders may also require a personal guarantee to account for the added risk. A personal guarantee is a formal, written promise of an individual to repay unsecured debt in the event that the business defaults. Usually, this individual is connected to the business in some way, for example, an owner or executive. An individual who signs a personal guarantee will no longer have their personal assets protected from the business.
To further understand no collateral business financing, let’s explore the advantages and disadvantages below.
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- Business Assets Protected. No business assets are being put up as security for an unsecured loan meaning that there is no risk of losing the assets.
- Quick Turnaround Time. Financing that does not require collateral typically is easier and faster to get.
- Options Not Limited. Even though unsecured financing is riskier, that doesn’t mean that your options are limited. We will explore all the types in depth below.
- Personal Assets May Not Be Protected. If a business owner agrees to a personal guarantee, their personal assets are no longer protected from the business. In the event that the business cannot repay the loan, this could put an immense amount of stress on personal finances and other aspects of life.
- Expensive. Unsecured financing is riskier to the lender and they’ll charge more interest to make up for it.
- Smaller Amounts. You’re not likely to get approved for a large amount with unsecured financing. The maximum amount lenders will extend to you will likely be lower when compared to secured financing options.
- Shorter Terms. Unsecured financing tends to have shorter terms than their secured financing counterparts. This means your periodic payment will be higher which can put stress on the business.
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Types Of Unsecured Business Financing
Somewhere along the line, lenders realized that borrowers were demanding financial products that didn’t require the use of traditional collateral. For this reason, borrowers got creative and developed various types of unsecured financing. Below are all the options you can choose from.
Unsecured Business Term Loan
An unsecured business term loan is the most common and traditional form of unsecured financing. A sum of money is extended to the borrower from the lender, then the borrower begins to make payments. The payments are due at specific times and consist of both principal and interest payments. Borrowers will make payments for a certain period of time until the loan is completely repaid.
When you borrow money to purchase additional equipment, it is known as equipment financing. Collateral is not technically required because the newly purchased equipment is the collateral. This type of financing is known as “self-securing” because what you’re buying is the security and nothing else needs to be given up.
Unsecured Business Line Of Credit
A line of credit is a flexible form of financing that allows you to borrow whatever amount you need, up to a specified limit. Once you take money out of the line of credit, you only pay interest until the balance is completely repaid.
The biggest benefit of lines of credit is the flexibility of use. You can use the funds for virtually anything including payroll, new equipment purchases or to aid your cash flow during a low season.
Corporate Credit Cards
Corporate credit cards work the same way personal credit cards do. You can spend up to a certain limit which becomes due at the end of a period, usually a month. They can be a simple solution to a financing need, especially if you already have corporate credit cards implemented into your business. You might even have the option of additional perks, such as collecting travel points or taking advantage of cashback offers.
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Merchant Cash Advances
A merchant cash advance is a great option for retail or service industries businesses that receive a majority of their payment via debit or credit. Businesses will be able to access a sum of money based on their future sales and then pay it back on a daily basis using an agreed-upon percentage of their credit and debit transactions.
Ways To Increase Chances Of Qualifying For A No Collateral Business Financing
Qualifying for unsecured financing can be tough, especially since more emphasis will be placed on credit. In order to increase your chances of approval, below are various things you can do before applying.
- Create A Business Plan. Nothing shows a lender that you’re dedicated and serious more than a business plan. A business plan can actually help you iron out kinks in your plan to help the process go more smoothly too.
- Provide Forecasted Statements. Lenders want to see that the money they lend you will eventually make its way back to them. If you can project true, positive cash flow and net income, that’s a great way to convince lenders to invest in you.
- Improve Your Credit Score. It’s good practice to check your business credit score before applying for financing. It’s even better practice to do what you can to improve it before approaching lenders.
- Consider Qualification Requirements. Many lenders have a clear list of qualification requirements for borrowers. By doing your research, you can strategically select lenders that have criteria you’ll fulfill.
Can I Get Unsecured Business Financing With Bad Credit?
Yes, you can obtain unsecured business financing with bad credit. However, your best bet is to work with alternative lenders as traditional lenders don’t tend to be flexible when it comes to credit. Alternative lenders have less strict standards and consider other factors, such as income and bill payment history.
When trying to secure financing with bad credit, ensure that you remain patient. Obtaining financing is definitely possible, but it can take time to find a lender that is willing to work with your circumstances. Patience is key.
Is Unsecured Financing Right For My Business?
Unsecured financing works well for many businesses – and it could work well for your business too. Although, before making any decisions, it’s important to understand the benefits and costs of using an unsecured loan. Business owners should also compare and contrast the use of a secured loan with an unsecured loan. In the end, a secured loan might be better for your If you’re interested in applying for any type of business financing, Loans Canad a can help.