Understanding Unsecured Loans for Starting Small Businesses

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PORTLAND, ME - NOVEMBER 28: Bobby Silva and Emily Stout of Worcester, Mass., shop inside Ferdinand on Congress Street at the base of Munjoy Hill as part of small business Saturday, November 28, 2015. (Photo by Gabe Souza/Portland Press Herald via Getty Images)

Opening a business requires capital to pay for supplies, rent a building, turn on the utilities, and pay employee salaries. The traditional way to get funding for a business is to take out a loan with a bank but getting business loans can be difficult to do. Fortunately, there are unsecured loans that you can take out to get the capital you need for your business.

What Is an Unsecured Loan?

When you take out a loan through a traditional bank, it usually needs to be secured by collateral. Many people use their homes to take out second mortgages or loans to start a business. The main problem with securing a loan with a house is that if you default on the loan, you could lose your house and end up with no place to live.

An unsecured loan does not require collateral to get the money you need. They are not offered by most banks or other lending institutions. Instead, unsecured loans are usually offered by alternative lenders such as payday loan companies. People may take out unsecured loans for minor home repairs, car repairs, or personal loans to get by until their next pay day.

However, there are other lenders who offer unsecured loans for larger amounts that people can use to pay for university expenses, buy a car, or invest in their small businesses. Lenders offering higher loan amounts may require borrowers to have someone guarantee repayment of the loan, have good credit, and have a stable monthly income of $6,000 or more.

Loan Amounts

Some companies offering unsecured business loans may lend borrowers anywhere from $1,000 up to $250,000, depending on their needs. It is important to calculate how much you need and what you can afford to pay back before taking out an unsecured loan. While you may not lose anything of value if you default on the loan, your credit rating will suffer.

The loan terms vary widely for these loans as well but many companies offer short-term loans so the money you borrow may need to be repaid in as little as 12 months. Also, the interest rates are usually much higher on these types of loans than they are with traditional loans from a bank. Interest rates could start out low for people with good credit, starting as low as 1.80% and going up from there if your credit isn’t so great.

The main advantage to getting money from a non-traditional lender is the speed with which you could get the money. Many lenders accept online applications and you could get pre-approved for a loan in as little as five minutes. The money could be transferred into your bank account the following day as long as you provide the documentation they need and are solvent enough to repay the loan in a year.

It can take several days to weeks to get a loan through a bank so if you need money fast, then an unsecured loan may be the best option for you and your small business.