If you are a small business owner, you might have heard of various loans to help you get funding for your business. One of the many types of loans are unsecured loans which differ from standard business loans and we are going to discover today why and how you can use it to help your business thrive.
An unsecured business loan differs from other types of common loans and contains one major difference: it does not require collateral for the loan to be secured. Collateral is something that you or your business owns, and you use it as security for repayment. Examples of collateral include property, cars, equipment, and much more.
With an unsecured loan, it is issued and supported by the borrower’s creditworthiness. The applicant might have to provide a personal guarantee. The lender can then not seek repayment by going after your assets.
Types of Unsecured Business Loans
There are several types of unsecured business loans that offer business owners a flexible and convenient way to fund their small business. Below you will find the different types of unsecured business loans.
Business Line of Credit
A business line of credit is similar to personal credit because you are allowed to borrow a certain amount of capital each year. This type of unsecured loan requires you to make repayments on the credit that you have actually used. You will not have a regular monthly payment schedule but there are usually minimum monthly payments required.
Business Credit Card
Business credit cards work similarly to a personal credit card. The biggest difference being that they are for business-related expenses only. They do not require collateral like secured loans, and they are based on your credit score. There are many kinds of business credit cards, including rewards cards, interest-free cards, low-rate cards, and more. Business owners are advised to pick the one that meets their needs.
Equipment financing requires collateral but not in the form of property like most other loans. Equipment financing uses existing equipment or the equipment you want to purchase to secure the loan.
Invoice financing is similar to equipment financing, expect instead of using equipment to secure the loan, you need to use the outstanding invoices you have as collateral for the loan. Invoice financing lets you borrow money from a lender based on the amount of money owing to your business.
Merchant Cash Advance
Another unsecured business loan includes a merchant cash advance where a lender purchases a business’s future cash flow and uses future transactions to repay the funds that are borrowed. The lender also charges a fee and they take a percentage of each future sale until the loan has been repaid fully. This type of loan is beneficial for retailers who receive a high proportion of payments through credit cards.
How an Unsecured Loan Can Help Your Business
Now that you are aware of the several types of unsecured loans and what they do. It is time to determine how an unsecured loan can help your small business. The following are five common ways a business owner can use their acquired funds to boost their venture.
Increase Working Capital
Working capital is the money your business has available to manage day-to-day expenses and other expenses that you might not have prepared for. This money can act as a safety net and is the difference between businesses that succeed or fail.
Hire or Pay Employees
When your business starts growing, you might need to hire additional staff to help things run smoothly. You may need extra funds to ensure your current staff are paid on time. A business loan is a great way to get you the financing to do either of those things.
Buy Equipment or Machinery
It can be expensive to buy new equipment and machinery, but they are essential to help your business grow or get things done in a quicker and more efficient way. This is where a business loan can come in handy.
If your business needs renovations, you can use your business loan for them so that you do no go into your working capital to make it happen.
Marketing & Advertising
Both marketing and advertising to boost your business and increase your sales but they are costly. Instead of going into your day-to-day funds, business owners can gain additional funds through an unsecured business loan.
The Bottom Line
Now that you know what an unsecured loan is and how it can help your business grow, you are more informed so that you make the right decision for the type of financing for your business. Just keep in mind that you do not always need to use your home as collateral to obtain business funding. Unsecured business loans are more flexible and convenient.