Unsecured Business Loan - Getting Working Capital Loans

by: Neal Coxworth

With many business owners hunting for working capital, an unsecured business loan appears like an enticing offer. Indeed, the Internet is overflowing with ads, sites and plain old come-on's for these types of loans. However, it is crucial to understand these offers for exactly what they are.

First of all it is important to understand the common definition of "unsecured" in the context of a loan. A secured loan is usually one that has a lien or some type of legal lien placed upon some type of hard assets possessed by the borrower. An example would be a car loan or a mortgage. The "security interest" for the lender is that if you do not pay, the lender will retrieve your car or house. In this case, the lender has "legal recourse", and can use the legal system to either force repayment, or seize the secured assets ( car or house in our example) if the borrower cannot make payments.

In both these examples, the borrower has the loan secured against personal assets and the loan is made based off of personal credit and income. An unsecured loan by definition, does not have a lien placed on assets held by the applicant or borrower. The loan is made only on the strength of the borrowers credit track record and their verifiable income.

In the context of business working capital loans, many offers are advertised as "unsecured" solely because these types of loans or cash advances do not secure the loan against the PERSONAL assets of the business owner. Technically, then, this loan is unsecured. If the loan is truly unsecured against both the personal assets of the business owner, and the business itself, then the loan amount usually will be very low, generally under $7500 and much lower if the credit track record has problems.

However, many merchant cash advance lenders will market unregulated cash advances as "unsecured". In reality, these types of advances, which have no upper limit on the rate being charged, usually do have a security interest against the assets of the business, not the business owner. They accomplish this by filing a UCC (uniform commercial code) lien against the business. This means if the business does not pay the loan as agreed and the business is sold, transferred or liquidated, the merchant cash advance lender has a right to the proceeds to satisfy the unpaid debt before the business owner does.

Such advances are usually made based on the future credit card receivables of the business and often come with restrictions attached, such as requiring the merchant to switch payment processors, buy equipment, and pay high upfront fees. The unregulated "cash advance" is really a sales tool to force further purchases or concessions by the owner in exchange for a high rate advance.

In conclusion, if you are business owner {searching-looking- for an unsecured business loan and the amount you are requesting is over $5000 with less than perfect credit, chances are you will not find it easily, if at all. However, there is a much more efficient option for those business owners who are seeking quick working capital up to $500,000 at rates that are 50% less than a merchant cash advance with no upfront fees and no requirement to switch processors. See below for more information