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What are Unsecured Business Loans?

business-841174_640As a small business owner, you know that thing more daunting – or in some cases, devastating – than a lack of customer demand, is facing an extended cash crunch.

Indeed, whether you need to cover repairs, hire additional staff, launch a marketing campaign, stock inventory and the list goes on, not having the working capital you need can do more than just jeopardize your success; it can threaten your survival. Fortunately, an unsecured business loan may be ideal for your situation, and give you the cash infusion you need to get or keep your business on-track for strong growth and sustained profitability.

Contrary to what some people believe, the “unsecured” part of “unsecured business loan” doesn’t mean that these loans are more precarious for borrowers like you. Rather, it simply means that they’re aren’t secured by collateral. This is appealing if you don’t have enough collateral to obtain a loan, or if like many borrowers, you don’t want to pledge your personal and/or business assets to a lender who is likely to undervalue them to reduce their risk exposure.

For example, you may have industrial equipment that is easily worth $75,000. However, a lender (and especially if we’re talking a bank here) is likely to value it for collateral purposes at a much lower rate; say, $50,000. This means you have to pledge even more assets. Again, this isn’t because the lender actually wants to take possession of your stuff and liquidate them. As mentioned, they just want to reduce their risk, and are invoking their version of the Golden Rule (i.e. they have the gold, so they make the rules).

What’s more, most unsecured business loans have a short and straightforward application process, a quick approval timeframe (usually a few business days), and it’s not a deal-breaker if you have bad credit, or in some cases even a discharged past bankruptcy.  It’s also usually possible to pay the loan back early to avoid interest, and without incurring any pre-payment penalties. Obviously, all of these benefits exist because banks aren’t involved.

While there are many different types of unsecured business loans, three of the most popular are: working capital loans, merchant cash advances, and business lines of credit.

  • Working capital loans are relatively short term loans that are typically used to cover daily business expenses or unexpected costs (e.g. emergency repairs, etc.). The loan is paid back in fixed installments per a pre-arranged schedule.
  • Merchant cash advances are for businesses that conduct most of their business through credit or debit card sales. Unlike working capital loans, a small percentage of daily payment card sales is withdrawn nightly to pay back the loan. When sales are strong, the loan gets paid off faster. When sales are slow, there’s more cash-on-hand to cover expenses, run promotions, launch ads, and so on.
  • An unsecured business line of credit (often called a revolving account) is a good alternative to a lump-sum long term loan. The biggest advantage is that you only pay interest in the funds you access, rather than on the full amount that is available to borrow.

And so, which one of these unsecured business loan options is right for you? That’s not a question that I can answer, because it really depends on what’s best for your business and overall cash flow needs. However, the above gives you a solid idea of what may be available to you, so that you can ask the right questions, do your research, and ultimately make a decision that ensures your business survives, succeeds and thrives well into the future.

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James

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