Fantastic Tips On Unsecured Small Business Loans

April 13, 2010

Did you know that 85% of loans made to small businesses originate through banks, according to the National Federation of Independent Business? There are a number of different options, but with a reasonably good credit history and associated rating, unsecured small business loans may be for you. There may be some expenditure associated with the origination of these loans, as more risk is attached from the lender’s perspective, but if you have a good track record and haven’t stretched yourself with your current credit lines, banks could listen sympathetically as you move forward.

Unsecured small business loans are generally discussed when the amount in question is less than $150,000. Due to their effective simplicity, unsecured small business loans do not take a long time to originate. As you might imagine, unsecured small business loans are essentially made in return for your reputation, and your signature on the document is the true promise of repayment.

In the case of a new business, you would personally need to guarantee these loans. In order to qualify you must have a credit score (also known as FICO) of more than 700, and your personal balance sheet must not show that you are overextended. When you apply, your use of credit will be looked at quite carefully and it is important that you don’t have more than 50% of any credit lines you may have access to engaged in other ventures. For example, with a total of $30,000 in available credit to you, you need to be sure that at least $15,000 of these funds are unencumbered. As your business moves forward and establishes its own credit history, the personal guarantee will become superfluous and in future you could attain unsecured small business loans by reference to your business credit by itself.

Many people will think twice before they sign over their major personal assets as collateral for a new business venture – and rightly so. After all, are you prepared to lose your home in the event of default on your business loan? Unsecured small business loans do not require you to pledge any of your personal assets, only your personal or business credit – that’s it. In the event your business fails, it is better to lose your good credit standing than your home.

Look at your personal situation very carefully before you apply for an unsecured small business loan. In particular, look at the higher interest rates that are typically associated with this type of loan and make sure that your revenue projections are able to account for these rates. With unsecured small business loans, your interest rates will range between six and 25% and generally speaking, these are amortized over a shorter period. The typical period is between five and seven years. Unsecured loans are typically more costly, but look at it from the bank’s perspective and realize that they are taking a much higher risk in this type of venture.

If you have plans for expansion and have carefully looked at these logically, with good thought process and projection, unsecured small business loans can be just perfect. You can originate these loans relatively quickly, so you can move quickly on your plans, and you leave your other significant assets unfettered. Then, for example, you can always look at getting a secured loan in future if you need more funds, and have numerous options available to you.

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