If you are an entrepreneur or small business owner in need of capital for your business and you don’t want to pledge your assets to obtain financing, it’s important that you fully understand what funding options are available to you. Unsecured financing is going to be your best bet. The major difference between secured business financing and unsecured business financing is that collateral is not required to be pledged to a lender to be approved; however interest rates can be higher with unsecured financing. Below I explain what types of unsecured business financing options are available to you as a small business owner:
- Vendor Lines of Credit (aka “Trade Credit”) – These are revolving credit lines extended to business owners by specific companies such as Office Depot, Office Max, Dell, or Apple, etc. They must be specifically used to purchase items directly from the vendor that extends the credit line. Approval can be based on your business and/or personal credit score and history. These types of credit lines are fairly easy to obtain and can help you build your business credit history and score so that you never have to use your personal credit to obtain business financing as your company grows.
- Traditional Unsecured Business Lines of Credit – These are revolving credit lines issued by banks that can be used to fund any business purpose or expense. In the current lending environment they are only issued to businesses that have been in business for at least 2 years and earn over $350,000 (sometimes $500,000) in revenue annually. Although you can obtain them without pledging collateral, high risk industries usually don’t qualify (e.g. restaurants or real estate). Furthermore, banks will require you to provide business tax returns, business bank statements, and any other business financial information to be considered for approval. If approved, you could get one large line of credit totaling 10% to 15% of your company’s annual revenue.
- Unsecured Business Credit Cards – These are revolving credit lines that can be used to fund any business purchase or expense. They can be obtained strictly by providing a lender with a personal guarantee (i.e. using your personal credit score and history to get an approval). Pledging collateral or assets to the lender to get approved for an unsecured business credit card is not required. Additionally, many lenders will not ask to see your personal or business financial information such as w-2’s, bank statements, tax returns, etc. Credit limits are often $2,500 to $20,000 and startups can generally qualify fairly easy.
An important question to ask unsecured lenders (to ensure collateral isn’t required for approval) is “will they take a UCC filing against your business?” If a lender states that they offer unsecured financing but they will take a UCC filing against your business to issue the debt, that isn’t truly considered “unsecured.” A UCC filing is a form of collateral a lender takes out against your business to let the world know they have an interest in your company because you have borrowed money from them to finance your business.