You have probably heard the term unsecured small business loans being used in many financial circles or as you go through your daily business operations. But what specifically does the term refer to. In general these are specialty loans for small companies, less than $100,00/year in revenue, that do not have a back asset. We will discuss what this means in further detail in today’s discussion.
Unsecured vs.Secured: For a loan to be unsecured it cannot be backed by a specific asset. If you purchase real estate, this is an example of a secured loan because the loan is backed by the property. In the event of nonpayment the lender has the right to reclaim the property and sell it in order to get their money back. This is not to say that lenders who give out unsecured loans don’t have recourse, they certainly do, it’s just more complex and they must go through further legal procedures to claim property.
Small Business Distinction: The distinction of a small business is somewhat varied, but in general this refers to any company that generates less than $100,000 a year in revenue and has less than 500 employees. The importance of this is that there are specially approved loans by the SBA specifically for companies that are within these parameters. These loans are still funded by 3rd party lenders, but are approved as part of the SBA loan program.
So what are unsecured small business loans? These are loans specifically designed for small companies, with less than 500 employees and $100k a year in annual revenue. They take into consideration that many of these companies do not have the extensive business history and revenue of larger companies. The SBA approved variety of these loans was setup to help small companies get funding, especially as banks merged and getting loans for small venture became more difficult. They are unsecured, meaning that there is no backing asset behind them. These tend to have competitive rates, but if possible you should still secure the loan with an asset whenever possible as this will afford you the lowest rate. Many companies will take an existing asset with equity and use that equity to borrow funds for other purposes. This can save you time and money. I recommend that you never back up a business loan with personal property however. You can always walk away from your company if things go very poorly, and you don’t want to ruin your personal finances in the process.