Small businesses rely on having good finances and sufficient capital in order to grow and invest in new business ventures. The good news is that there are seemingly endless options for small business financing.
However, many of these financing options require business owners to put up collateral. Collateral is essentially security against a loan. In order for lenders to reduce their risk, they often require borrowers to put up the valuable property in case of default.
If you can’t pay back the loan, the lender can repossess the collateral in order to pay off the remaining debt.
Unsecured business loans and business credit cards are great alternatives for business owners who don’t want to or can’t put up collateral and are in need of business funding.
But which one is right for you? Let’s take an in-depth look at the pros and cons of each option.
Unsecured Business Loans vs. Business Credit Cards: Who’s Who?
Unsecured business loans are simply business loans that don’t require collateral. These loans can be used for almost any business expense, including:
● Business operations
● Equipment
● Hiring staff
● Marketing
● Technology
● And more
Unsecured business loans do typically have higher interest rates than secured loans. Since you don’t have to put up any collateral, lenders are taking on more risk by lending to you. Be that as it may, this means that if for some reason you aren’t able to pay back the loan, you won’t have to sacrifice valuable business property to make up for it.
Business credit cards, on the other hand, give you access to a revolving line of credit. Meaning, you can continually access the funds that you need (up to your credit limit) as long as you pay off the outstanding balance each month.
Like unsecured loans, business credit cards don’t require you to put up collateral in order to access funds.
Credit cards are a great method of business funding as they allow you to access quick financing while improving your business credit at the same time. You may also be able to take advantage of rewards and low introductory interest rates. However, it’s important to pay back your credit card debt as quickly as possible in order to avoid accruing interest.
Which Option Is Best For You?
When it comes to choosing between an unsecured loan and a business credit card, it entirely depends on your needs. You may even find that you need both in order to finance different ventures.
Say you own a factory that mass produces products on a very large scale. In order to meet production demands, you need to invest in expensive manufacturing equipment. This can be a very major expense.
As such, an unsecured business loan would better suit your needs as you would be able to access a larger sum of money. Additionally, you may be able to pay it back with a fixed interest rate in order to avoid accumulating excessive debt from interest.
On the other hand, a business credit card may be more ideal in order to finance ongoing expenses while investing in your business’ expansion.
For example, if you own a retail store and want to invest in opening a second location, a business credit card would help you finance the original store’s operations while allocating more funds to the opening of the new store.
Unsecured business loans are typically better suited for larger investments while credit cards are great for working capital and financing standard business operations.
How To Get An Unsecured Loan
The application process for an unsecured loan is similar to any business loan but may have stricter requirements. You should be prepared to provide:
● Business financial statements and tax returns
● Personal financial documents
● Your business plan
● Business licenses
● Plans to allocate the funds
● Expected return on investment
● Positive credit history
● And other financial documents
The application for a business credit card will be very similar, but will often have more lenient eligibility requirements.
If your small business requires immediate funding and you don’t want to put up your valuable property as collateral, an unsecured loan or business credit card may be perfect for you.
Are you in need of funding for your company?
Is there something you want to invest in that would help your business?
Which alternative would work best for your needs?
Tweet us @MikeSchiemer #BootstrapBusiness with your thoughts and experiences with startup funding and unsecured business loans.