Unsecured Small Business Loan

An unsecured small business loan is one of several options available to entrepreneurs and small business owners. Whether or not it is the best option depends on a variety of factors involving the financial stability of the owners, the company itself, and, in some cases, the viability of the industry. Additional considerations include the purposes for the borrowed money and which option provides the best overall terms. When an entrepreneur first gets an idea for a company, the initial excitement can overshadow clear thinking. It's very important to create a functional plan that clearly answers basic questions about the product or service the entrepreneur wishes to sell or to offer in the marketplace. Writing a business plan compels an entrepreneur to conduct the necessary research to answer questions regarding the target audience, availability of vendors, and marketing opportunities. The owner of an established company also needs a plan in order to stay competitive. A well-done plan will include financial statements that forecast future income and expenses. An established company will also have financial documentation of past sales and expenses. This information will be helpful when applying for either a secured or unsecured small business loan.

A secured loan simply means that the amount borrowed is tied to a particular asset which acts as collateral for the financing. For example, a mechanic obtains secured financing to purchase an automobile diagnostics computer for his repair shop. If the payments are not made, the lender may choose to repossess the diagnostics machinery. In contrast, an unsecured small business loan is not based on collateral or a particular asset. Instead, it will probably be based on the individual's personal history of creditworthiness as reflected in his FICO score. The term FICO comes from Fair Isaac and Company, the firm that pioneered and developed credit scoring as a way to gauge an individual's ability to handle personal finances and repay loans. Using multiple variables and mathematical models, individuals are assigned a number from 365 (bad) to 850 (excellent). The number 680 is often regarded as a benchmark between a good and poor credit history. With an acceptable FICO score and qualified application, the mechanic may obtain an unsecured small business loan in less time and with less documentation than traditional bank funding. He can still purchase diagnostics machinery, but if payments are not made as required, the machine will not be repossessed. However, the lender will take steps to recover the borrowed funds which may include taking the mechanic to court.

An entrepreneur may have difficulty getting a traditional bank loan for a new venture simply because she lacks a track record. Most experts advise entrepreneurs to tap into personal finances for their new companies before applying for financing. Read enough stories about start-ups and a common thread emerges -- a lot of entrepreneurs finance their new ventures with credit cards. Though many people don't realize it, this type of financing is a type of unsecured small business loan. The individual signed an agreement for a revolving line of credit based only on the issuing company's qualifications. No collateral is required and very little documentation. But financing a startup or even an existing company with plastic can be a dangerous practice. Soaring credit card bills can strangle an entrepreneur's dreams. Sometimes entrepreneurs tap into their home equity to get the money they need to launch the startup. But this is also a risky plan. Should the startup end up shutting down, the individual is still stuck with home equity payments. Defaulting on this obligation is out of the question or the person could lose her home. The temptation to tap into a house's equity is seldom worth the risks. The dream will have a more solid foundation if time is spent before opening the venture to save as much cash as possible. Being prepared also demonstrates maturity and wisdom. "Happy is the man that findeth wisdom, and the man that getteth understanding. For the merchandise of it is better than the merchandise of silver, and the gain thereof than fine gold" (Proverbs 3:13-14).

When no other funding option works out, an entrepreneur or owner may turn to a lender for an unsecured small business loan. The online companies that offer this type of financing promote such benefits as no collateral and little documentation. Before applying for unsecured financing, the individual should read the fine print. It's important to understand the terms of the loan so there are no surprises. For example, the applicant will want to know if the interest rate increases after an introductory period and if there is a pre-payment penalty. Some lenders refer to their loans as cash advances. The applicant is actually selling future income at a discount as a way of paying back the advance because the lender takes a percentage of future credit card sales as payment.

Instead of tapping into home equity, using plastic, or applying for another type of unsecured small business loan, prospective entrepreneurs and small business owners may want to research the services provided by the U.S. Small Business Administration (SBA). This federal agency provides guaranteed loans to qualified applicants at low interest rates. Though the required paperwork and documentation can seem quite daunting, the end result may be a good source of financing. In addition to loaning money, the SBA provides many other valuable services to entrepreneurs and small business owners. With offices throughout the United States, the agency often hosts workshops and seminars that help prospective entrepreneurs learn the nuts and bolts of starting a venture and assist established small business owners reach new goals. Workshops on money management may help individuals determine whether a secured or unsecured small business loan is the best option given their unique circumstances.

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