With all the funding options available today, it seems there is a loan for every business.  Each loan has its advantages and disadvantages and a smart borrower will do the research necessary to determine the business loan that best fits their profile and their needs.  There are two basic loan types: secured and unsecured.  Secured loans, as implied, are funds secured through liens on collateral.  Collateral may be anything of significant and stable value, like real estate, personal property, or vehicles.  These loans have the best rates because of the borrower’s commitment of assets, but even some people that are qualified for secured loans are not comfortable with the potential loss of property should they default on payments.  Thankfully, an initial lack of assets is no longer the road block that it used to be thanks to the availability of unsecured business loans.

Most business owners choose unsecured loans as a means of paying upstart costs when they do not have the private assets necessary for a new business.  They are frequently used for funding improvements including the purchase of new equipment or the modernization or expansion of facilities.  Unsecured loans are also favored by business owners experiencing a crisis.  They may go toward emergency repairs or compensate for a temporary shortage of capital.  Unsecured loans are smaller than secured loans—usually $50,000 or less—and also tend to have shorter lengths of maturity.

Unsecured loans do not require any collateral, but they usually have a slightly higher rate of interest to compensate for the lender’s increased risk of loss.  Obtaining an unsecured business loan depends heavily on the applicant’s credit history and credit rating.  A better rating can mean the difference between approval or rejection and is the key determining factor for the size of the loan.  Nevertheless, it is still possible for business owners with imperfect credit to obtain an unsecured loan.

A well prepared business plan is crucial when seeking any sort of funding, but it is especially important when the applicant has less than perfect credit and is seeking an unsecured loan.  This is the borrower’s chance to prove to the lending institution that they and their business are a good investment despite the risks implied by lack of assets or a less than excellent credit score.

Before applying for a business loan, the borrower should research interest rates, calculate their principle, and determine their payments for each type of loan.  This sum should be added in to their current budget with cash flow estimates and other sources of income or debt taken into consideration.  They can then use this information to prove that they can realistically afford to repay the loan within the predetermined time frame.

Defaulting on a business loan is a serious issue for business owners.  While borrowers with a secured loan risk losing their collateral, defaulting on an unsecured loan can ruin both your reputation and your credit.  On the other hand, successfully repaying an unsecured loan is one of the quickest ways to improve your credit.

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