Securing an Unsecured Loan

Most financial institutions ask a business to put up some sort of collateral in order to service a loan. They do this because it gives them a guarantee when processing a small business loan (SBL). Real estate, inventory, or other assets that the bank can place a lien on are the preferred types of security.

Typically secured loans are easier to get than unsecured loans, but if a business has assets and has been in business for a while, a secured loan may not be necessary. The criteria used by financial institutions to determine eligibility for an unsecured loan vs. a secured loan is almost identical. So, if you are eligible for a secured loan more than likely you're eligible for an unsecured loan.

An unsecured loan is always more attractive to a business, and not because the bank can't come after the businesses assets if they default. Even if a business doesn't put anything up against the loan, the bank still may have recourse when trying to seize assets. The reason an unsecured loan is so attractive is because on paper their assets will still belong to the business and moving them around to create additional cash flow will be a lot easier.

Another route available to businesses is trying to get an unsecured SBL is acquiring a business credit card or a line of credit from a bank or credit union. If possible, a business would be better off receiving a line of credit because it typically comes with a lower interest rate than a credit card. Some businesses are seasonal, or just in the midst of a down period, and for these struggling companies taking out a line of credit is a well thought out business decision.

Because of high unemployment, large foreclosure rates, and a mortgage crisis that nearly sunk the country into a depression, borrowing money for personal investments has become more difficult recently. And, while borrowing money as a small business isn't any easier than it was before the economic downturn, the chances of getting funded as a business is a lot better than getting personal funding. With the way the economy is today many struggling businesses jump at the first loan option available to them with out doing their due diligence. This is a major mistake. A business should explore all options, including trying to find unsecured funding, in order to find the best deal out there.