Unsecured small business loans could become important when you have a good business plan, but cannot easily raise a normal loan because of:
- A credit record that has somehow become damaged, or
- Lack of acceptable security to offer as collateral.
However, a good credit record makes raising unsecured loans easier. It might also be possible to repair your credit record.
Do remember however that even unsecured lenders are not charitable organizations and would expect the loans to be repaid. They might even have the means to enforce repayment. For your own sake, it is important to develop a definite and practical plan to meet your obligations.
A Typical Small Business Start Situation
You have no previous financial statements to show your profitability. You also do not have the required funds of your own to bring in as equity. Most lenders would require financial statements for past three years and a minimun equity investment of your own.
To cater to such typical, but difficult, situations many lenders have devised loan products that does not require collateral security. Some might provide unsecured small business loans if you have a good personal credit record.
They might look at the intangible strengths that would not be reflected in financial statements and determine that if you are provided an unsecured small business loan, you would be able to pay it back.
Leasing Instead Of Buying
Leasing could be considered a form of unsecured small business loan because it gets you high value assets with little down payments. Leasing companies would buy the asset and then lease it to you.
You pay periodic lease rents, which could be generated using the leased asset. At the end of the lease period, you might even have the option to own the asset yourself (if the lease agreement is a ‘closed’ one with such an option).
You could charge the lease payments as a business expense, thus lowering your tax liability.
Personal Unsecured Small Business Loans
If you have a good personal credit record, and 50 per cent or so of your credit card limits are still available, you might qualify for an unsecured small business loan for your small business start.
The lenders are likely to check whether you had credit for at least two years, and what your record was. You might get unsecured loans of 10000 to 100000 dollars if your credit history is good.
If your credit is not good, lenders might accept an alternate guarantor whose credit is good. This guarantor could be someone who believes in your business idea and is ready to support you with his or her own guaranty.
Another situation where you could qualify for an unsecured small business loan is where you are receiving regular monthly payments under some settlement or other. There are lenders who would advance immediate cash to you against such entitlements.
Unsecured Loans Against Personal Assets
You could also finance your small business start with loans against your personal assets, such as cars and house. The loan amount could even exceed the value of the collateral, making the excess an unsecured small business loan.
Depending on the risk involved, you might have to pay higher rates of interest.
Venture Capital And Angel Investors
Though not a ‘loan’, venture capital is similar in that you need not provide a security (but must provide a good business idea). Where you cannot bring in the required proportion of your own funds, venture capitalists and angel investors might provide you capital. They look at your business idea and if it looks good to them because of some innovation or for other reason, they decide to provide support.
In return, they would expect to share in the prosperity of your business. They would look to receive returns higher than current market rates. They would also seek to make substantial capital gains by selling their shares as your business grows.
There are many private venture capitalists and business angels. SBA also funds Small Business Investment Companies to provide venture capital assistance to small businesses.
Other Unsecured Alternatives
There are agencies that would help you repair your credit record and consolidate all your borrowings. These might be good alternatives if your credit record had become damaged owing to reasons that might not be repeated.
While these might be more appropriate for regular income earners like employed persons, you might also check the possibility of getting an unsecured small business loan using these alternatives. Make sure, however, that you do indeed have a detailed business plan with excellent market potential. And don’t quit your day job until the business is established.