If you run a business you no doubt understand the need for funding. You likely had to seek loans or venture capital to start your company. As you know there are advantages and disadvantages to all sources of funding. Venture capital doesn’t require immediate repayment or interest, but you lose part of the company. Loans require interest, but you get to keep 100% ownership. Today we will be discussing one source of funding, the unsecured small business loan.
First what makes an unsecured small business loan unsecured is that there is no backing collateral. An example of a secured loan would a real estate loan. The loan is secured by the real estate being purchased. It is understood, and explicitly stated in the loan agreement, that if repayment is not made as a agreed upon that there is a process that can be followed for the lender to take ownership of the property. The idea being that they can use the revenue from the sale of the underlying asset to repay the loan. This means they have more security, and loans of this type tend to have lower interest than unsecured loans with nothing backing them.
What makes it a small business loan specifically is that these loans are typically structured with the needs of these types of businesses in mind. Businesses of this type don’t have as much revenue for example and so the loans are more limited in scope. Also many small business are new and don’t have any established business credit, so an unsecured loan for small business must often rely on the personal interest of the individuals who own the company. Furthermore, large scale bank loans typically require a business to be in business for more than 10 years to get large scale funding.
It should be understood that although these loans share much in common with secured loans, they have some important differences. They tend to have slightly higher interest rate, as there is nothing backing them. They tend to have shorter repayment periods, typically less than 2 years. A secured loan for real estate can have a repayment as high as 30 years by comparison. They also have lower requirements for the condition and age of your business. Your business credit needn’t be that impressive, or existent, and you don’t need to be a long term established business. Like all loans, it is a balancing act between the risk taken by both parties and the benefit of the loan, an unsecured small business loan is no exception.