Most business owners will seek financing at various points over the years. Business financing may be necessary to buy equipment, real estate, and more. It may also be useful for covering a slow accounts receivable pipeline, to make repairs to a facility, to expand the company or product line and to accomplish other necessary or desirable goals.
When you are preparing to apply for a business loan, you can choose to apply for a secured or unsecured business financing product. With a closer look at what unsecured business financing is and how to set up an affordable loan, you may be able to more easily get the financing you need.
What Is Unsecured Business Financing?
Secured business loans are financing products that use an asset as collateral. The money is usable for purchasing the collateral or to refinance it, and common examples are auto loans, equipment loans and real estate loans. On the other hand, unsecured business financing does not have collateral. Instead, these loans are typically underwritten heavily depending on the financial strength of the business, the borrower, or both.
Who Uses Unsecured Business Financing the Most?
There are many reasons why some business owners may prefer to use unsecured business financing rather than apply for a secured loan. For example, you may not have an asset that you want to collateralize. Remember that any assets collateralized by a loan can be seized or repossessed by the lender if you default on the loan. The funds from an unsecured business loan can typically be used for a wide range of purposes, such as for debt consolidation, to pay payroll or other expenses and more. Any business owner who needs access to extra cash for a wide range of reasons may apply for this type of loan.
How Much Is Usually Spent on Unsecured Business Financing?
Secured loans are usually only available in loan amounts up to the value of the asset or as a percentage of the asset’s value. For example, a commercial real estate loan may get an approval for up to 70 or 75 percent of the sales price of the property or of the property’s’ value. With unsecured loans, however, you can typically borrow up to the limit available under the loan program. You may find varying loan amounts offered by different banks and financial institutions. For example, some programs may have a $25,000 loan amount, and others may have a $1 million loan amount or higher. Remember that you will need to qualify based on your financial strength or based on the business’s financial strength for the loan amount you apply for.
5 Ways to Save Money on Unsecured Business Financing
Your monthly payment for unsecured business financing will become a regular expense in your budget until the debt is repaid in full. With this in mind, it makes sense to keep this expense as low as possible. There are a few steps that you can take to reduce the cost of your financing.
1. Boost Your Business and Personal Credit Score Before Applying
Depending on which loan program you apply for, your interest rate depends in large part on your personal credit score or your business credit score. In some cases, both scores will be up for review. Personal credit scores are most commonly reviewed for loans that require a personal guarantee by the borrower or business owner, and this is common with unsecured business loans. However, you may be able to find a non-recourse loan that does not have a personal guarantee requirement. Take time to review your credit rating before you apply. If necessary, improve your rating so that you can qualify for the lowest interest rate possible. This will directly affect your loan payment.
2. Compare Interest Rates
Even if you have a great credit rating, you may find that some lenders or banks offer much lower interest rates on their unsecured business financing programs than others offer. Shopping around to find the lowest interest rate possible is a great idea. Remember, however, that the interest rate is only one factor to consider when trying to set up the most affordable loan. The loan payment will be the result of the interest rate as well as the loan term and loan amount. The overall loan costs are the result of loan fees as well as interest charged over the life of the loan. One should thoroughly revise all factors to determine the most affordable loan option available.
3. Focus on Loan Fees
Most lenders charge loan fees on unsecured business financing programs, but these fees vary substantially. Some will charge higher up-front fees, and they will offer a lower rate as a result. Depending on your financial needs and situation, you may find that one option is more preferable than the other. However, do the math to determine which option is most affordable over the life of the loan as well. Furthermore, remember that many aspects of lender fees are negotiable.
4. Pay Attention to the Loan Term
You may notice that the interest rates vary slightly based on which loan term you select. The loan term can have a major impact on your monthly loan payment as well as the total interest charged over the life of the loan. For example, a shorter term will create higher monthly payments, but the overall savings on interest charges can be substantial. A shorter term allows you to pay off more principal with each payment for financial benefit. It is wise to choose the shortest term possible that generates a monthly payment that you can afford.
5. Use a Loan Calculator
As you can see, there are many moving parts to consider when trying to set up the most affordable unsecured business loan. For example, as the term changes, the rate will change. As the loan fees change, the rate will change. These factors can all affect the cost of the loan as well as the loan payments. A smart idea is to use a loan calculator online. Look for a calculator that takes loan fees into consideration and that calculates the total interest charges over the life of the line. You can plug multiple scenarios into the calculator to make the most educated decision possible when applying for an unsecured business loan.
With an unsecured business loan, your interest rate will typically be higher, and your loan amount will be lower in comparison to applying for a secured loan. However, unsecured business financing may be the more desirable option overall or the only feasible financing solution available in some cases. If you have decided to apply for an unsecured business loan, keep these points in mind so that you set up the most affordable loan for your needs.
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