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A Guide to Unsecured Debt Financing for Small Businesses

A Guide to Unsecured Debt Financing for Small Businesses

Unsecured debt financing is a financial obligation of the borrower to the lender, (to pay back a loan or line of credit) which is not protected by a guarantor or collateral. An unsecured debt is backed by the creditworthiness of the borrower. Secured loans require an asset to act as collateral, while in some cases guarantors have to sign loan application forms before debt financing. These requirements are set to offset failure in meeting terms for repayment by the borrower because of bankruptcy or liquidation. Unsecured loans are also known as signature loans or personal loans.

The biggest shortcoming of unsecured loans falls on creditors. Financial institutions or lenders who offer unsecured loans take the biggest losses if a borrower is declared bankrupt or has to liquidate assets. This is because secured loans are treated preferentially as compared to unsecured lenders in such a scenario. Secured creditors receive claim to the pledged assets first, leaving unsecured creditors to tussle over the remaining. This means that the proceeds from liquidation of assets first go to servicing secured creditors before unsecured creditors. Unsecured creditors, as a result, get to benefit from a small portion of these assets. In some cases, unsecured debts may not be fully repaid.

Such huge underlying risks in unsecured loans have led to financial institutions to place high interest rates. Creditors issue high interest rates to cater for the risks of losing the entire loaned funds if the borrower defaults. This feature deters most borrowers who see unsecured debts as unsustainable and pricey especially in small businesses. However, this source for debt financing is favorable in cases where other assets have been collateralized to secure loans.

Examples of Unsecured Loans

Some of the commonly used unsecured loans for small businesses include credit cards, mortgages, term loans, merchant cash advances and deferred payments.

Small business credit card is a short-term debt financing that business owners can use to finance their routine expenses. These cards are issued by financial institution without a collateral to businesses.

There are term loans that operate like unsecured loans. Consolidation loans are a good example. These loans can be either secured or unsecured. A consolidation loan is an unsecured loan taken to pay up and combine all bills and payments into one loan. This term loan offers a flexible repayment and in most cases is cheaper.

Merchant cash advances are unsecured loans that business owners can use. These are lump sum payments made to the borrowing company to offset shortcomings in its business activities. The merchant capital provider does not require a collateral when applying for the debt. However, the lender is contractually obligated to use part of their daily income from sales made to pay up the debt until maturity.

Deferred sales are also good examples of unsecured loans that businesses can use. Deferred sales sustain small business in times when they cannot afford to make daily payments on purchased goods. They can later on be paid when the enterprise is stable and profiting.

How to Get Unsecured Loans

To apply for unsecured debt financing online is one of the simplest methods to getting these loans. The process to getting a small business credit card is less tedious. For sole proprietorship enterprises, the process works similar to the usual credit card. The applicant does not require an EIN. Alternatively, your social security number can still be used. You also need to ensure your credit scores are high to raise the chances of securing a loan.

There are financial institutions that offer consolidation loans. Companies like Lending club are widely known to offer such peer-to-peer debt financing that you can use to consolidate. These debt consolidation companies will help you sort out your loans. Therefore, apply for unsecured debt financing online because these web-based companies offer the lowest rates.

Merchant cash advances can be accessed by looking for merchant cash provider. These can be companies like peer-to-peer financial institutions or individual lenders. Merchant cash providers can easily be found online. Therefore, apply for unsecured debt financing online to ensure you do not run out of working capital during off-peak.

To get deferred payment on purchases made, as a business, you need to partner with companies known to offer such privileges. Ensure you trade and partner with these companies for you to access deferred payments. Normally, a deferred payment is the prerogative of the supplier who may assess your creditworthiness and the nature of your mutual business dealings.

What Can Unsecured Debt Financing Be Used For?

Small business credit cards can be used to service office supplies or purchase equipment while saving up on costs. Alternatively, business owners use credit cards to finance their petty cash. Credit cards are efficient because they help in saving up on expenditure. This is because they limit miscellaneous purchases and help in planning unlike liquid cash.

For consolidation loans, you can primly use them for debt management interventions. High interest rates from other loans can lead your business to bankruptcy. Taking up a consolidation loan will reduce the negative impact of your debts, prevent late payment and improve your credit score.

Merchant cash advances have a huge interest and require regular payments from your sales. Therefore, use these loans to boost your production and sales for greater margins. This will cushion the daily or repeated expenses you have to incur in servicing these cash advances.

Deferred payments can act as cheap loans to buy essential capital goods. Instead of taking up a cash advance or normal loan, deferred payments can be used.

How Can LenCred Help You Get Unsecured Debt Financing?

If a small business credit card is what your enterprise needs, as LenCred, we will help you. Our consultants advise our clients on what factors they should consider when taking up credit cards. We ensure the debt-to-income ratio is sustainable for your business. This entails credit management techniques and good planning. We are also giving you referrals to financial institutions that offer the best credit card services. We will assist you on how to apply for unsecured debt financing online.

At LenCred, we will assign a  consultant to guide you in devising a loan consolidation plan. We will inform you of the repayment features you should look for in your loan, the suitable rates for your debt ratio and how to spot fraudulent ‘financiers’.

Additionally, we will advise you on whether taking up a merchant cash advance is sustainable for your business. This will involve assessing your debt-to-income ratio prior to taking up the loan. It also assesses why avoiding high interest rates will save you years of making repeated payments gained from your sales. This may include looking into other alternatives to debt financing and companies to apply for unsecured debt financing online.


About Brittni Abiolu

Brittni AbioluBrittni has been an entrepreneur and investor for 10+ years. She writes about her experiences as a business owner and uses data and information from reliable sources to back up what she writes about. Through her writing she aims to educate other entrepreneurs on how to obtain capital and build successful businesses doing what they love.


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