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What Is an Unsecured Business Loan?

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image for Kerkez / Getty Images


Kerkez / Getty Images

As a small business owner, it’s likely that you’ve found yourself in need of additional financing to cover startup costs, hire more employees, purchase additional inventory or cover some other monetary need.

According to the 2019 Small Business Profile released by the U.S. Small Business Administration Office of Advocacy, approximately 6.1 million loans worth under $100,000 were issued to small businesses by American lending institutions. Similarly, the 2018 Federal Reserve Small Business Credit Survey estimated that approximately 71% of the 12,000 small businesses surveyed sought $100,000 or less in funding, with loans or lines of credit being the most common form of financing.

Lenders typically offer two main types of funding: secured loans and unsecured loans. But which type of loan is right for your business? Understanding the key differences between the two could be the difference between a safe infusion of cash and a costly financial miscalculation.

The biggest difference between secured and unsecured business loans is that the latter doesn’t require the borrower to provide any collateral against the amount they’re borrowing. In fact, Jeff Fazio, head of small business specialists at TD Bank, said that type of loan is “strictly backed by the borrower’s creditworthiness.”

“Small businesses typically seek an unsecured loan when they either cannot qualify for a traditional loan or can’t negotiate better repayment terms with another lender,” Fazio said. “The personal guarantee terms that are outlined within unsecured loans can be very generous for borrowers, but any default can have long-term ramifications that outweigh benefits like negative effects to your business’s credit score.”

Because an unsecured business loan is better for the borrower, the lender generally charges much higher interest rates than they would for a loan backed by collateral. This kind of loan is also much harder to obtain as a result. The inherent risk involved in an unsecured business loan naturally means it will generally be offered as a short-term loan to alleviate some of the lender’s risk.

To qualify for an unsecured business loan, Fazio says, your small business needs to be able to “show the lender a good credit rating, a solid financial history and a cash flow forecast.” He pointed out that it’s rare for a traditional lender to approve an unsecured loan, with most of those kinds of lending agreements coming from online lenders.

 

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If your business has enough financial goodwill in the form of a strong credit score and you can afford the interest rates, there are some benefits to obtaining an unsecured business loan.

The first and most immediately apparent advantage is that you don’t need collateral. Usually, lenders want borrowers to put up valuable items like real estate, vehicles, or intangible assets like investment portfolios and business trademarks as backing for the loan. Without the need to put those items at risk of seizure by the lending institution, you can rest easy knowing you won’t lose them if something goes awry.

However, items can ultimately be seized by the lender if they’re included in the personal guarantee that every lender must sign to obtain an unsecured business loan. Such an agreement is legally binding, after all.

Unsecured business loans usually require less paperwork, skip the appraisal process for any collateral and thus have a speedier process overall. Unsecured business loans are also discharged in the event your company goes bankrupt, which isn’t the case for secured business loans.

While the benefits may seem worthwhile, there are some major caveats that you should consider when looking to obtain an unsecured business loan. First and foremost, you may not even qualify for one.

Banks heavily rely on your personal or business’s credit score to determine whether they’re willing to offer you any type of loan, but given the high-risk nature of unsecured business loans, the bar is set much higher. While there’s no minimum credit score you need for a short-term business loan like this, a lower credit score tells the lender that you may have a harder time paying the loan back.

If your personal credit isn’t great, your business has a less-than-stellar credit history or your bad credit regularly keeps you from getting a credit card, let alone some other type of cash advance, your loan application likely won’t land you any additional business financing opportunities anyway. It will always be harder to borrow money if you have trouble making your monthly payments.

If your business needs a large amount of funds, you likely won’t be able to get as much as you need through an unsecured loan, which generally only offers smaller amounts. Again, because there is no collateral to back the loan, banks are less inclined to go out on a limb and provide large sums of money.

Furthermore, an unsecured business loan may not be right for you simply based on how significantly higher interest rates are for this type of loan. The rates are almost always higher than those of some major credit cards, with some lenders charging a 100% APR. How high that figure ends up being depends on your credit score.

“Given a lender takes more of the risk involved in granting the unsecured loan, interest rates are high for borrowers,” Fazio said. “With unsecured business loans, we often find the borrower might default and not have the means to repay the loan.”

This brings us to the biggest warning, which really should apply to any borrowing you may be considering – defaulting on an unsecured loan means big trouble for you and your business. Even though you don’t put up any collateral, minimizing the risk for the lender, there are other ways that failure to pay back your loan could cause major financial problems for you.

In the event that you default on an unsecured business loan, your personal and your business’s credit score will take a major hit. Also, just because you didn’t put up specific collateral doesn’t mean you won’t lose any assets. The lender can sue you and your business for not only the balance of the loan, but interest and other costs as well. Your business’s bank accounts can be garnished, liens can be placed on your business’s assets, and all that can happen in months.

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‘There is no new normal’: Worcester small business owner pivoted during COVID-19 and expects only more change after pandemic

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It took about eight minutes for the bank to reject Natalie Rodriguez’s application for a loan through the Small Business Administration.

Rodriguez opened Nuestra, a Puerto Rican inspired restaurant in Worcester, in January of 2020. When COVID-19 arrived months later she discovered Nuestra wasn’t eligible for the federal or state funding that thousands of other establishments received.

To qualify, restaurants were required to show payroll and salary for years before 2020. Those figures didn’t exist for a restaurant that weren’t open in 2019.

“[I was] determined and knew that ‘no’ is not an OK answer,” Rodriguez said. “A door may close but you may need to kick down another door.”

Rodriguez then applied for conventional loans only to be led to more closed doors. Less than 10 minutes after applying for an Economic Injury Disaster Loan, she received notice that her poor credit score resulted in her application being denied.

Rodriguez used the dead end with the SBA to create a new path for herself and Nuestra.

She not only learned how to improve her credit but wanted to ensure others didn’t have to follow her journey as an entrepreneur.

Rodriguez extended the “Nuestra” brand to include financial advising. She started Nuestra Financial in April of 2020.

“Now I’m helping others. I’ve been able to restore my credit,” Rodriguez said. “I’ve been able to help others restore their credit and be able to help them make a business themselves if they so choose. I’ve been able to survive.”

Without grants and other funding, Rodriguez managed to keep her restaurant open through funds generated from Nuestra Financial.

“I was very quiet about it in the beginning. I didn’t want people to be like, ‘Oh look at this girl, she just opened a restaurant in the middle of a pandemic,’ and talk smack,” Rodriguez said. “About a month or two later, a light bulb hit and I was like, nobody pays my bills but me. I needed to mind my own business and not worry about what other people thought.”

In creating Nuestra Financial, Rodriguez said she’s helped Worcester residents restore their credit and purchase new vehicles and homes.

Rodriguez said financial literacy is rarely taught to children in school and wasn’t something she learned. When a situation arises like a rejection notice for an economic disaster loan, many don’t know how to respond or where to find answers.

Rodriguez said she’s helped young and old people, along with those who have bad credit or no credit.

“We lack the confidence, including myself, because we weren’t taught,” Rodriguez said. “So if you don’t know something, you weren’t taught, you’re not going to be confident about it.”

Coming out of the pandemic, Rodriguez remains confident about both her businesses. Nuestra, the restaurant, while closed for daily service continues to provide catering services. Rodriguez is still preparing what the future holds for the restaurant but plans to announce an update soon.

As masks start to become less a part of daily routines, Rodriguez, as a small business owner, doesn’t envision many differences from this year to last.

So many aspects of life remain uncertain from rising food costs to a potential third booster for vaccines and whether the country will ever reach herd immunity for COVID-19.

The pandemic arrived with Rodriguez immediately pivoting. As it approaches its potential end, Rodriguez will continue to do what helped her to navigate it.

“I feel like there is no new normal just yet,” Rodriguez said. “I think we’re all just trying to adjust and pivot at the same time and getting creative. I think it’s where we all are.”

Related Content:

Owner of Worcester’s Nuestra restaurant, closing due to COVID impact, has something she’d like to say to Gov. Baker

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Columbus Mattress Wholesale moves to newer, larger Gahanna store

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More than four years back, Cathryn Clark’s boyfriend, Christopher Robbins, was on the hunt for a new mattress. He just couldn’t find one at an affordable  price. 

Clark, 29, and Robbins, 34, who are now engaged, were living in Franklinton, where they still live today.

They had no experience owning or operating a small business; Robbins worked as a retail assistant for SAS Retail Services while Clark worked as the communications director for two Methodist churches. 

But in 2017, Robbins, with Clark at his side, took the leap and opened Columbus Mattress Wholesale on the West Side, with the goal of  helping low-income consumers secure mattresses and other bedtime products.  

“We really wanted to bring a store to people that, you know, they weren’t paying an arm and leg, but they still could get a good night’s sleep,” Clark said.

Customers at Columbus Mattress Wholesale can pay cash or credit, for example, but the business also works with financing companies that serve people without credit scores, with bad credit or who are lower income. 

Last month, the business made a big move. It expanded from its original location on Harrisburg Pike to a store double the size at 435 Agler Road in Gahanna.

Clark said she and Robbins saw a need in the broader area, with many of their customers coming from outside the Hilltop, such as Linden.

Nestled between Dollar Tree and the Ohio BMV in Gahanna, the new storefront opened Memorial Day weekend and sells mattresses, bed bases, bed frames and pillows. Mattress prices range from under $100 to more than $1,000, depending on the size and brand, which includes some well-known names such as Serta, Beautyrest and Casper.

Clark said while she and Robbins originally sold solely Ohio-based brands, they’ve branched out to national brands as business has grown.

Columbus Mattress Wholesale also offers free same-day delivery on most orders from customers living in Columbus. 

Clark does a little bit of everything for the business, from running communications, to working on the sales floor, to managing the sales team, to ordering what they sell. 

She said a big mission for herself and Robbins, beyond doing business, is aiding the community.

“We’ve seen a lot of people struggle,” Clark said.

Clark said she and Robbins work to mentor other people who are hoping to open or currently own a small business. She added that the store starts employees at $17 per hour.

She and Robbins haven’t decided yet what they will do with the original location — which is currently closed — but said they might shift it into an accessory store.

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@SarahEDon

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A Guide to Getting Mobile Deals with Bad Credit History

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You’re interested in a new mobile deal but there’s only one thing that’s stopping; you’ve got a bad credit history. Does that mean that your hopes of getting a new phone contract are crushed? Well, not exactly. In this article, you will learn how to get a mobile phone with no credit check required and how you can navigate the issue to get a great deal even with bad credit history.

Why is a bad credit history a big deal?

When taking a new phone contract, it means you’re entering into a financial agreement that requires you to make payments in monthly installments. As such, many providers of the service will want to ensure that they’re entering into an agreement with someone who will pay the agreed amount without violating the terms.

The best way for them to have that assurance is by looking into the credit history of the client. But does it necessarily mean that if you’ve got a bad credit history you can’t honor your side of the bargain in a phone contract? Of course not; which is why this article gives you the options you can pursue to end up landing a pretty impressive deal.

Although you might not find a deal that includes the latest devices in the market, you’ll not lack a relatively cheaper but functional option. For instance, if you’re a great fan of the iPhone, you might end up landing the iPhone XR instead of the latest release of iPhone 12. When the deal is cheaper, you stand higher chances of success as opposed to one that just dropped in the market and so it’s in high demand.

Another alternative is to find a contract that comes with a used handset as such tend to be less strict in terms of credit history requirements. That means you’re likely to pass the test of a contract with an already used gadget as opposed to that of a brand new phone.

Another alternative could be to go for SIM only deals especially if you already have an alternative source for a handset. Most of the providers won’t require you to sign any contract and so they’ll not look into your previous credit history. SIM only deals tend to be intensive on minutes, texts and data offers.

Networks that favor people with bad credit

There are networks that are more lenient to people with bad credit history than others. Major networks including Vodafone, O2 and EE usually come with strict requirements that might only frustrate you. The following are the alternatives you could consider looking into:

Smarty:The company offers SIM only plans that don’t require you to sign any contract. If you have an alternative handset, this could be a great alternative to consider as they won’t do a credit check on you. Their services and offers run on a monthly rolling basis which means you can walk away at any time in case you’re dissatisfied with the quality of service you’re getting. Their deals start at 2GB of data and unlimited texts and calls at a cost of £5 to unlimited calls, texts and data for £16.

Giffgaff:You won’t be subjected to a credit test here as well during sign up for one of the packages that the network offers. You’ll be required to sign up for a monthly bundle of your choice that’s inclusive of calls, data and texts. You can proceed with the same plan or switch to a new one after the month is gone. Most of their deals start at £8 a month.

VOXI:The network has numerous offers that operate on a 30-day rolling basis. They also won’t bother performing a credit check on you as it has no use in the first place. A bonus with this network is that they won’t include the social sites you frequent in their data charges.

Mobile phone to go with a SIM only deal

The SIM only deals we’ve highlighted above means that you’ll need to have a separate handset. In case you don’t have one already, you can take a separate mobile phone contract to go with your preferred SIM only deal. The other alternative is to buy one outright. But in case you don’t have money to make the purchase, you can always save up and buy when you’ve accumulated enough.

Some great smartphones that are classic and yet won’t put a huge wall in your pocket. Coveted brands such as iPhone and Samsung have great devices such as the Samsung Galaxy A52 5G that goes for £349 and the iPhone SE valued at £399. As you can see, with some savings, you should be able to get your hands on these gadgets and many others out there. And if you feel that these cost on the higher side, you can opt for refurbished phones. Refurbished phones refer to those handsets that have been used but have undergone intensive testing to ensure they still have got higher functionality.

When do credit checks apply?

Credit history is required by providers that have a mobile phone that requires a payment plan spanning several months or years. In most cases, the major network providers including EE, O2 and Vodafone will do a background check on your credit check before allowing you to sign up for their deals. Some factors that might make you have a poor credit rating is when you’ve missed several months’ payments, made late payments or placed too many credit applications concurrently.

Want to improve your credit rating?

The following are several steps you could consider to help you improve your credit rating. Most of these revolve around efficient management of your money, bills and other forms of payments.

  • Have a proper and functional bank account
  • Pay all your outgoing bills on or before the due dates
  • Ensure you’re registered on the electoral roll
  • Don’t share your account with a person with poor credit rating

That’s how you can work out things to get mobile deals even if your credit history isn’t a good one. But going forward, the best action plan would be to work towards improving your credit rating so that you can take advantage of the opportunities that come up in future.

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