Great Considerations On Unsecured Small Business Loans
By w2may | October 12th, 2010Did 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. While this form of loan is sometimes more expensive to originate, as it carries more risk to the lender, if you have a solid track record and are not overly extended by your current credit lines, then you could well find a sympathetic ear to help you move forward in this way.
Unsecured small business loans are generally considered when a businessman or woman is looking for relatively small sums, typically less than $150,000. Consequently, these are fairly simple to originate and unsecured small business loans can be arranged really quickly. Your reputation is key here and unsecured small business loans will rely very heavily on your signature as a guarantee that repayment will be made.
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? With unsecured small business loans, your personal assets do not come into the equation, only your business or personal credit. In the event your business fails, it is better to lose your good credit standing than your home.
It’s a very good idea to critically analyze your plans before applying for an unsecured small business loan, though. Your revenue projections should be able to absorb the interest rates associated with the loan, as these will invariably be higher in comparison to their secured counterparts. 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. If you need funds relatively quickly, these are ideal and they will of course leave your significant assets untouched. If you should need more funds later on you can always look at getting a secured loan — thereby leaving your options as wide open as possible.
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Tags: business, credit, financing, investment, loan
