Are you interested in unsecured funding for your business? You are not alone. This is something that both new and established businesses can benefit from. Before you choose this type of funding, though, you must consider the pros and cons. Although unsecured funding has become very popular, it does not mean it is your only option.
In this case, the word “unsecured” means that no collateral is required. This is the opposite of a secured loan in which you must put up collateral, such as real estate, in order to be approved.
Although you may be discouraged because it seems that most of your financing options require collateral or a pledge of personal property or object of value to secure the repayment of a loan. There are several types of financing and options that do not require collateral.
No Stake? Yes, Loan!
Now, most small business owners have heard of SBA (Small Business Administration) backed loans. Most loans go through banks and are easier with collateral, although that’s not your only option. You can also do what’s called a personal guarantee in which you would be held accountable for loan repayment. In their 7(a) loan program, which can be used for a variety of different business needs, the SBA requires that you show proof of positive cash flow for debt service (cash flow available to pay current debt obligations) and acquisition price.
If accepted to the program, the SBA guarantees 75 percent of any loss on the loan to the lender:
“The 7(a) Loan Program is SBA’s primary program for helping start-up and existing small businesses, with financing guaranteed for a variety of general business purposes. SBA does not make loans itself but rather guarantees loans made by participating lending institutions. In this way, taxpayer funds are only used in the event of borrower default. This reduces the risk to the lender but not to the borrower, who remains obligated for the full debt, even in the event of default.”
The four main types of alternative or online financing are:
- A term loan – this is a lump sum you borrow and repay on a fixed schedule over a set period, including the annual percentage rate; short-term loan usually has a repayment term of one year or less whereas long-term loan usually has repayment terms of 3 to 10 years. Interests rates can be fixed or floating and start as low as 6%. This option be used to finance nearly any business need.
- A line of credit (LOC) – gives you access to a set amount of cash that you tap when necessary. A LOC can generally use by businesses that need short-term financing to bridge cashflow gaps. The borrower can access funds from a line of credit at any time if they do not exceed maximum amount set in agreement and meet other requirements and make timely minimum payments. The borrower is only charged interest on the amount of money borrowed like a credit card as opposed to a traditional loan. Cyclical businesses often rely on unsecured LOC as a source of off-season working capital and are not designated for a specific purpose or purchase.
- Invoice factoring – also known as invoice financing or accounts receivable. This type of financing is an option for small business dealing with unpaid invoices and is specifically designed for businesses that issue invoices with net terms, usually between 30 to 90 days. Instead of waiting for payment, the business owners take an advance which they then pay back with a fee when customers settle their accounts. Invoice factoring allows borrowers to offer better payment plans with the plan to win more business
- Merchant cash advances – gives you an upfront sum of cash in an exchange for a piece of your future credit card sales. This option is only available to businesses that process credit cards for payment. Strong credit is not required. There are little to no stipulations on how the cash is used, so there is freedom to use the funds as the borrower sees fit. The factor rate is fixed and applied to the entire cash advance upfront. Merchant cash advances are less of a loan as opposed to a cash advance. They can usually get approved within a day or two with very little paperwork. Do not rely on repeatedly for working capital, as the interest is very high and this financing option without collateral can get very expensive.
P2P Financing
Then you also have what’s called peer-to-peer financing (P2P). It’s done completely online and requires the cooperation of individuals because the loan is an unsecured loan (usually – secured loans are rare and usually backed by luxury goods) provided by an individual to a borrower based on their business plan. There’s no bank or financial institution that plays as an intermediary here. A potential borrower completes an application on a peer-to-peer platform, it’s assessed and, based on their credit, they are assigned an appropriate interest rate.
Low/No Credit? No Problem!
For the borrower with a less than perfect credit score, peer-to-peer lending has its advantages, as it’s more accessible than a bank loan and the interest rates tend to be lower because of the higher competition between lenders and lower origination fees. There are websites and platforms that offer much more extensive information on how to apply for P2P financing.
What’s the Best Option?
So, do your chances of getting that small business loan look a lot better if you put down collateral? Yes, absolutely. By all means, if you’re able to wait until you have something valuable to secure the loan, then do.
If that’s just not possible, you do have other options to look at like crowdfunding, investors, or alternative lenders. Not having the bank qualifications doesn’t have to be the nail in the coffin to financing your dream. And, a note of caution – with the predictions that the Federal Reserve will raise rates four times this year, perhaps this isn’t the time to wait around. This may in fact be the time to act now or be filled with regret later.
Contact the Experts
We have been funding businesses for decades. If you would like to explore your funding options, get in touch with one of our financing experts for a free consultation.
