Unsecured business loans provide important funding to small businesses. In 2024, companies relied on $261 billion unsecured loans worldwide. That figure is expected to grow to more than $682 billion by 2024.
This type of funding is valuable as it can be used to cover everything from bills to costs associated with staff growth and business expansion. Unsecured loans can be more expensive than other types of borrowing, as they do not require any form of collateral.
In addition to being prepared for a higher interest rate, knowing how to effectively manage unindebted loans is important to avoid negative consequences from borrowing.
1. Choose the lender that is right for your situation
Shopping for an unsecured loan that is right for your business is another important step, and you need to consider a variety of lenders and loans, including government loans, traditional banks, credit unions, and online lenders.
Loans supported by Small Business Management (SBA) are one of the most common forms of borrowing and can generally be found through banks, credit unions and alternative lenders. There are various types of SBA loans available, but they are all known for setting maximum interest rates.
In addition to SBA loans, credit unions offer other types of unsecured companies to businesses. These loans often come with more competitive interest rates, but they are usually members of credit unions and must meet strict eligibility requirements. Additionally, the application process can take a long time.
Online lenders are another option for unsecured business loans. These types of lenders typically offer a quick financing process as well as fast applications. Once the loan is approved, you can receive as little as 24 hours of cash. This is useful if you incur the expected business costs. The repayment terms offered by online lenders are more flexible. This is an important consideration if you are looking for a loan for your unique needs and business budget.
2. Please check the credits
Please check your personal and business credit scores before applying for a loan. Check if the report has an error saying it can be deleted, or if there are things you can do to give your score a quick boost. It will help you ensure the low cost of your loan.
You should also monitor your credit score when you are paying off your unsecured business loan to make sure you are quickly fixing any issues that arise and avoiding errors that could potentially damage your score.
Bankrate Insight: How do you get a business credit score?
Establishing a business credit score takes time. To get started, apply for an Employer Identification Number (EIN) from the IRS to separate your personal credit from your business credit. Opening a business bank account and business credit card can also help you build a credit profile, such as establishing a track record of responsible debt payments.
3. Read the Loan Agreement
It is important to read carefully and ensure that you have a complete understanding of the legal documents before signing them.
your Loan agreement We will explain an overview of how a loan works. You will see a section showing how interests will be calculated when payment is due Loan fee. It also explains what happens if you missed a payment or there are other issues with your loan.
Some common areas to look for in a contract include:
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terms of service |
Basic details of a loan include amount, duration, interest rates and fees such as origination and early repayment fees. |
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Penalties for non-payment |
This outlines the fees and penalties to deal with if you miss a payment. Also, if you have a loan, it may indicate the bounty period of the loan. |
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Acceleration clause |
This clause explains how lenders can request immediate payment of the full loan balance by default. |
4. Building payments on budget
A business budget is an essential tool for business owners to truly understand their financial position and the power to effectively manage their business. Budgets also help businesses manage their debt repayments.
Your budget needs to explain how much money the company will make, how much money it will spend, where the income will come from, where it will go. Make sure your business loan payments are included in your business budget. This helps ensure that your loan fits monthly, quarterly, and annual budgets and maintains monthly repayments. As things change, updating your budget over time is also an important step.
Each business budgets in a variety of ways. Some common budgeting strategies include:
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Master budget |
This is a single master financial document that contains all the financial information of the company, typically for a year. There may be a variety of low-level budgets focusing on specific things, such as labor and sales. |
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Operational budget |
This is a fundamental method of budgeting to look at a company’s revenue and expenses over a period of time. |
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Cash budget |
Cash budget examines business cash inflows and outflows over a set period, including weekly, monthly, and quarterly. |
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Zero-based budget |
Zero-based budgeting sets the budget for all expenditure categories to $0 at the start of each period. You must then justify spending each period. This is a convenient way to ensure that your company is using its funds as effectively as possible, but it requires effort. |
5. Pay your bills on time
Paying your bills on time will help you avoid additional charges, fine interest rates, and credit losses.
Considering the importance of timely payments, consider setting up automated loan payments whenever possible or creating reminders regarding future due dates. Automated payments ensure that your loan payments and other business invoices are paid on time each month through repeated transfers. As a business owner, this will save you time and help you avoid late loan fees. Autopay can be set up through a bank using the invoice payment feature. Additionally, your lender may be able to set up Autopay.
6. Pay more than the minimum – if that makes sense
For some companies, exceeding the minimum is a good idea. Larger payments mean paying off your loan faster than you would expect and getting out of debt faster. It also reduces the amount of interest you accrue and saves money.
However, it may not be a good idea.
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If your loan has a repayment penalty:Please make sure it’s not on the loan Prepaid penalty. If the lender charges it, you can pay the fee by paying the loan early. You will also want to see what kind of interest your loan has and how your payments apply to your loan balance.
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If your loan has a factor: If your loan applies a factor instead of interest, paying the loan early will not actually save you money. The coefficient applies to the initial balance, and early repayments do not reduce fees.
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If it has a negative impact on cash flow: If you spend too much money on your loan payments, it may not be enough to cover other expenses. You also need to consider opportunity costs. You may be able to use the extra cash more effectively and create business growth that will result in more profits than money you can save by paying extra loans.
7. Don’t get too much debt
Some debts aren’t necessarily bad. Using your credit properly will help you grow your business faster and you can use your new revenue to make loan payments.
If you borrow too much, you can still end up with large loan payments, especially if your business is slow and your revenue is lower than expected. Additionally, excessive liabilities can strain the business’s ability to cover cash flow and operating expenses.
It’s better to limit borrowing, grow at a slower, more sustainable pace, borrowing too much and try to pressure the company to pay big loans.
8. If you are struggling, talk to your lender
If you have problems with repayment, contact the lender to discuss the situation. It’s better to take this step faster than slowing this step to get help before the situation grows beyond control and affects your credits. Many lenders are happy to work with you to help you manage your debts and will prefer to suddenly lack payments and enter default.
Your lender may be able to help you by providing delays or tolerance. They can also work with you to consolidate your debts, restructure your debts, refinance them, or, in the worst case, to settle for less than you owe.
9. Avoid the consequences of not paying a business loan
Failure to pay an unsecured business loan can have serious consequences. After you missed your payment, your loan will be delinquent. When this happens, lenders can assess deferred fees and other penalties.
If you miss a few months’ payment, your business loan will default. Once this happens, lenders can immediately use the loan acceleration clause to request a full repayment. The lender can bring legal action to enforce payments against your company, and if you sign a personal guarantee, your personal assets can be obtained.
It can also miss payments, miss loan defaults, damage credits, reduce your score and leave a negative mark that will stay on your credit report for seven years. Bad credit can make future borrowing difficult, which can lead to the resolution of more expensive, poor credit business loans.
10. If that makes sense, refinance
If your business is struggling to keep up with your loan payments, refinance may be able to make your loan more affordable. Refinances may allow you to get lower interest rates or extend the loan repayment period to reduce monthly payments.
Before applying for a refinance, check your business and individual credit scores to assess your qualifying ability. Review the debt-to-income ratio, and business revenue and profits are also a good step. The best qualified applicants have a solid credit score and a low debt-to-income ratio.
11. Separate personal and business finances
As a business owner, maintaining your business finances apart from your personal finances can be a critical step, such as when managing debts like unsecured loans. By separating finances, you can track business cash flows and expenses and make it easier to grasp payments on your invoice, including your loans. Also, if you don’t have a business bank account, it can be difficult to get a loan in the first place.
Separating finances can also help protect personal assets, if you have a loan default.
12. I have plans to make payments in emergencies
Establishing emergency funds or cash reserves as an employer is an important way to navigate uncertainties or economic downturns that can affect your ability to continue paying on business loans. These types of funds help to keep your business in these unexpected developments and ensure that your credit score is not affected by unpaid bills. As a general rule, experts recommend that you set aside enough to cover the costs of 3-6 months in an emergency.
Conclusion
As a business owner, understanding the various financial tools available to you and how to use them effectively can be key to long-term success. If you manage responsibly, unsecured business loans can be one of these valuable tools. However, prior to borrowing, you will be engaged in due diligence by ensuring your budget is able to accommodate loan repayments and understanding the loan terms and risks of the borrowing.
