Much of the money business owners borrow to manage their cash flow and meet unexpected business expenses are unsecured business loans. That is, loans that are issued and secured only by the borrower's creditworthiness, and not any specific type of collateral (like real estate or a piece of new machinery).

These unsecured business loans are also called signature or personally guaranteed loans. To qualify, the owner and the business typically need high credit scores.

Unsecured business financing avoids the risk of putting your valuable assets at risk for funding. However, a lender may make up for that increased risk by charging a higher interest rate on the business loan and force it to be paid back over a shorter period of time.

Let's take a look at the two types of unsecured business financing so you can weigh your options.

Fixed Business Loans

For these types of loans, the company borrows money to fund a new expense, cash shortfall or investment in their business. No specific collateral is pledged if the loan is not paid back on time. Instead, all the company's assets of are typically at risk. If that company goes out of business, they may have to liquidate, but many times these assets have little value to the lender.

As mentioned, these loans may require a personal guarantee by the owner so they become responsible if their business can't pay back the loan. This is important since the owner's personal assets could include collateral such as their home, real estate or a car.

Some alternative lenders offer revenue-based loans with no personal guarantee for businesses if they meet (and verify) specific annual cash revenue requirements and amount of time in business. Funding of these business loans typically happens in days with repayment time frames in months or a few years. These loans are “termed out" so equal payments are the same every month until it is completely paid.

Unsecured business financing can be received from traditional banks, but they are more commonly given today by many online lenders. These rates are usually in excess of 15 percent.

Business Lines of Credit

An unsecured business financing in the form of line of credit can be a great option if your company has a variable need for cash during certain times of the year.

Many business owners want access to funds at a low rate with flexible payment options. A business line of credit gives you access to a set amount (like up to $25,000) that you can borrow and pay back in uneven installments at any time. (Typically, only the interest on the borrowed amount needs to be paid every month.)

It is generally used for businesses with seasonal cash flow is seasonal or ones that want to launch a new product where the odds of success are very high. Business lines of credit can act as a kind of cash-flow insurance policy that is there when you need it.

To qualify for this type of unsecured business financing, you need to have:

• favorable business credit scores,
• a high personal credit score,
• low overall personal credit utilization ratio and
• proven business cash flow to cover all repayments.

Business credit lines usually come from banks that have a rigorous approval process. But these types of business loans also have lower interest rates (usually under 10 percent), with no cash advance charge or prepayment fees.

Again, these typically require a personal guarantee and the owner needs to pledge all the assets to the business if the loan is not repaid.

An unsecured business financing in the form of line of credit can be a great option if your company has a variable need for cash during certain times of the year.

With any type of money that is borrowed for your business, you need to ensure you have the plan and the projected cash flow to pay it back in the committed time frame to the lender. These types of loans should not be used to fund current losses where this additional cash infusion does not generate additional profit that helps with repayment.

Read more articles on loans.

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