Definition

• When a business owner takes out an unsecured business loan, according to the business funding website BusinessFinance.com, he receives funds from a lending institution without using collateral to secure the debt. This source of financing can generate critical operational and even start-up funding for businesses without the risk of losing valuable business equipment or property should the loan become delinquent.
  
  

Function

• When a business owner or principle officer requires additional funding for a commercial venture, he may complete a formal loan application at a bank or lending institution. The application, according to the online lending company FastUpfront.com, will typically collect relevant business financial information that includes the amount of debt currently outstanding, average monthly income, other non-debt monthly expenses and even the monthly amount processed in credit card transactions. When the business owner supplies this information, a loan officer will review the application and request any additional details necessary for processing the request. If the bank approves the loan, the institution will generate a check for the amount or make a direct deposit into the business's bank account; regular monthly repayment installments then begin within 30 to 60 days.
  
  

Approval Factors

• Because an unsecured business loan does not use collateral to ensure repayment, banks may have more stringent approval requirements for this type of debt. According to the financial reference website BankRate.com, many lending institutions have curtailed their lending practices, and some no longer offer unsecured business loans.
  
  To qualify for and successfully receive an unsecured loan, BankRate.com recommends that businesses first develop a strong working relationship with the lending institution; business owners can then capitalize on this relationship to help secure essential funding. In addition, banks may require extensive information on the business performance and growth record, so business officers should be prepared to provide this information for several recent years. In evaluating the loan application, lending institutions will also carefully evaluate more traditional information like the business's income-to-debt ratio, industry strengths and weaknesses, repayment history on other obligations and length of time in business.
  
  

Benefits

• Unsecured business loans, according to BusinessFinance.com, can offer businesses a convenient source of funding for a number of different business-related expenses. The flexibility of these funds allows the business owner to use them in any area where the business may require an additional boost. In addition, unsecured business loans do not require offering collateral as security, so a business that falls behind on an unsecured loan may not risk loss of valuable equipment or property.
  
  

Considerations

• Though unsecured business loans do offer a number of advantages, they can also be more expensive to obtain. According to BusinessFinance.com, unsecured loans often carry a higher interest rate since the bank has no collateral to ensure repayment. These loans may also be somewhat more difficult to obtain. As BankRate.com points out, many banks have curtailed unsecured lending. Depending on the lending institution, too, the application process may also require financial information on the business owner himself, as he may become personally liable for the loan should the business default.