Unsecured Business Loans: Are They Really That Bad?

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A Quick And Simple Method To Gauge If One Is Right For Your SMB

Opinions on unsecured business loans fall on two far ends of the spectrum. Often, sites will strike the topic down flat—“We won’t talk about unsecured business loans here,” they say. And that makes sense when you consider the connotations of “unsecured” and read articles about how they aren’t subject to federal laws that protect the borrower from outrageous interest rates. Certainly, they can be risky—even horribly unwise to acquire—but it depends upon your circumstances.

There are, of course, times when taking out something like a merchant cash advance is exactly what you need, when waiting for a traditional business loan through a banking institution will cost you time, collateral, and a credit check.

So, in defense of the unsecured business loan, let’s clear the air (and maybe the fog) surrounding them. What follows are circumstances in which you’d be well advised to get yourself an unsecured loan, and times when you’re better off doing just about anything else.

First: What is an Unsecured Loan?

An unsecured business loan is a type of loan given to a business that doesn’t require any collateral in exchange from the borrower and is given to companies as an investment in future financial growth.

Only businesses that demonstrate strong earning potential will receive a loan because it will be repaid either as a certain percentage of their daily credit card sales or a certain dollar amount to be taken directly from the borrower’s bank account until all debt is repaid.

As such, unsecured business loans are only appropriate and beneficial to certain types of small businesses. Here is a breakdown of situations in which unsecured loans would be a wise way to go, and when they would be a mistake:

Green Light

  • When you need cash quick because your business or company has just landed a government contract or has been subcontracted, and you need resources and output fast to complete the job.
  • When your business is running strong, and you are looking to expand or invest in a new product, update software, etc.
  • If you are in manufacturing, or a similar business that needs to pump money into sudden production.
  • Your business is established, and you need money for anything that will increase your sales or income.

 Red Light

  • Don’t take this if you need a bailout. You will not be able to pay it back.
  • These are also off limits to startups because (as you’re likely to know) they’re going to be in the red a while. Unsecured loans are repaid through future sales and a percentage of your business’s profits are skimmed off the top of your credit card sales or your company bank account.
  • If your business is not already profitable, you’re unlikely to be approved in the first place.
  • Don’t have a firm plan for the funds? Have a purpose, and have a plan for how to make the money useful, otherwise, don’t do it.

Image: iStockphoto

About The Author

Jim Rutherford is an avid reader of Forbes and fishing blogs when he’s not working his day job as a writer for VMC Capital.