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Types of Unsecured Business Loans

Unsecured business loans| Excel Capital Management

 

When deciding what type of business funding is the right choice for your particular situation you have to analyze your options deeper than just asking yourself “what do business loans cost”?. When you have already made up your mind about business funding and committed to the fact that acquiring working capital is necessary to take it to the next step for your business you have two broad options to think about unsecured business loans or secured business loans, which one is the right choice for you? In general it seems pretty obvious what the difference between a secured business loan and unsecured business loans is, right? One asks for collateral and the other does not  while that logic seems to be correct at face it more value most business owners need to understand that there are a variety of options available in both categories of funding (not just loans) and that their are a variety of business assets you can leverage to avoid having to pledge physical collateral or a commit to a personal guarantee to raise capital for your business.  

We have decided to put together a quick guide exploring a variety of different unsecured business loans and other funding products So you can determine what type of funding is the the best choice for you. We will aim to  explain the differences between each type of products and what kind of security interest or guarantee they may have attached to it.

We have all heard about unsecured business loans as a business owners but what does that really mean “unsecured”? First we’ll start by telling you what it doesn’t mean, it doesn’t mean that if you decide to wake up one day and say “I don’t want to pay my funding back just because the sky is blue” you are free and clear of your credit obligations. No, what this refers to, depending on the type of funding, is either a removal of a personal guarantee or a removal of personal and most business assets, in the case of the inability to repay. What this serves to do is create a veil between your personal or physical assets and the credit obligations you make in the business world. To make it clear all unsecured business loan use your receivables as collateral which means if you stop having receivables (or money that is collected from sales and services) than technically the security interest in your receivables is worthless since you have no more receivables. That is why the rate can be higher than secured loans. Additionally, most of these options will not require a first position lien filing on anything related to the business meaning the funding received is the last to be collected in case of a bankruptcy or liquidation.

Split Funding (also known as a Merchant Cash Advance)

When explaining a merchant cash advance we like to call it split funding because literally what it means is, we apply a split to your receivables until the funding is paid in full. The specifics of the split or percentage held back of your Visa and Master Card and other credit card processing volume is based on the contract that is agreed upon prior to getting funded and is generally underwritten based on your credit card processing volume coupled with your gross monthly revenue deposited into your business bank account. Many business owners at first are confused by this concept and what this means but we will aim to simplify the definition of a merchant cash advance and the mechanisms used to collect this type of funding product. All Merchant Cash Advances utilize your future credit card sales to calculate the repayment pace of the advance and there are 3 ways to provide these type of unsecured business loans.

  1. Direct Split with Your Credit Card Processing Provider  – This is the most seamless type of split funding. All this means is we utilize one of our friendly credit card processors (click here for a list) to divert the agreed upon percentage to us and applied to the outstanding balance whilst you receive the remainder of the credit card processing sales directly in your existing bank account like you normally did before receiving the business funding. This split happens every time you batch out your terminal and you receive no delay in deposits and you repay at the pace of your business. This requires your process allow us to place as split on your credit cards sales. The beauty of a direct split is that it gives a funding option to business owners who have a high amount of NSF’s (non sufficient funds) or overdrafts or have a very volatile sales cycle.
  2. Lockbox Funding – This method is utilized when a business does not use one of our friendly credit processors and does not want to switch their existing merchant processing provider to facilitate the funding. A lockbox is good because many merchant processors have early termination fee’s and this avoids paying them to get split funding. How a lockbox works is a bit more complex than a direct split on your credit card processor. We set up a lockbox account also known as a bridge account or you. This bridge account is an actual bank account where you receive online login credentials and a bank letter. This account is solely used for splitting your credit batches between the funding institution and your business account. Once a batch is received into that account it is designed to automatically ach the specified percentage to the corresponding accounts. Due to the process associated with this type of funding there is typically a 24 – 48 hour delay in the time it takes the money from your batch to hit your business bank account.

In order to set up a lockbox you need to follow these 3 steps:

  • Sign the lockbox form provided on the funding agreement authorizing the lockbox account
  • Receive the bank letter created upon receipt of the lockbox form.
  • Call your credit card provider and tell them you want to switch where your credit card processing  activity is being deposited. Usually they can do this over the phone, online or will ask you to complete and sign a bank change form and have it return to them via email or fax which will require you to attach the copy of the bank letter to the executed bank change form. This can take upto 48 hours depending on your credit card processor.
  1.  Variable ACH – This mechanism is used to collect payments when a business owner does not work with a “friendly” merchant processor and does not want to incur the 24  – 48 hour delay in deposits. The way this works is pretty straightforward. Our collections department logs into your merchant processing portal on a daily basis to see what the last batch was and then collects the specified percentage via ach from the business bank account. This type of split funding requires access to your merchant processing online account at all times or else it would constitute a default.  When a deal is in underwriting it will be determined if this option is available based on a formula that is heavily weighted on the average ledger balance in the bank account. Unlike direct split if a business has many overdrafts in the account they will be declined for a variable ach but can still get approved for a direct split or lockbox method.

What’s Needed To Qualify for Split Funding?

  • You must accept credit Cards with a minimum of $5,000 per month in credit card sales
  • You must be in business for at least 3 months
  • You must be a US Citizen or have a Visa

What’s Paperwork is Needed To Qualify for Split Funding?

  • A signed and completed application
  • Four months of recent business credit card processing statements
  • Four months of recent bank  statements

All Varieties of Split funding are derivatives of unsecured business loans since they are not technically loans and advances of future sales at a discount.

Revenue Based Factoring:

Revenue Based Factoring| Unsecured Business Loans

Revenue Based Factoring

This type of funding was created through the need of unsecured loans and other funding products for businesses that do not accept credit cards. Prior to 2008 there was no solution to this problem and all unsecured products (other than credit cards) were based on credit card sales. Due to the high demand for funding Revenue Based Factoring was created. The way this type of funding is structured is more based on overall revenue or cash flow. According to the contracts most institutions purchase a set percentage of all your future sales which you as a business owner then sell at a discount. This percentage of future sales is then estimated over the course of an anticipated term, generally three to 24 months. This future revenue is then collected  in a variety of payment options generally on a daily, weekly, bi weekly or even monthly repayments. In Most instances it will be daily or weekly and for better qualified clients it will be bi-weekly or Monthly. Within the language of the contracts the you have the right to adjust the payments based on your revenue. So if you have a drop in revenue you are allowed to reduce the payment obligations.

This type of funding is usually approved in 24 hours and can fund same day if the stipulations (see list of items that may be needed) are met. According to the contract it follows the same rule of thumb as a split funding or a merchant cash advance. A lien may be placed against your future receivables but most institutions do not require any personal guarantee or collateral and are considered unsecured business loans. Revenue based factoring will usually subordinate behind any other pre-existing funding you may have and will usually be the last creditor to collect in the case of a bankruptcy or liquidation.

What’s Needed To Qualify for Revenue Based Factoring?

  • You must be in business for at least 6 months
  • You must be a US Citizen or have a Visa
  • Generally you must maintain an average ledger balance of $1,000 in your business bank account

What’s Paperwork is Needed To Revenue Based Factoring?

  • A signed and completed application
  • Four months of recent business credit card processing statement
  • Four months of recent bank  statements
  • Financial statements may be required from time to time.

Unsecured Lines of Credit:

These Lines of credit revolve based on your outstanding invoices and receivables. Unsecured lines of credit are not technically unsecured business loans but a line of credit which were designed knowing that many merchants want to have the ability to prepay and draw down on capital as they desire instead of being obliged to take a full funding amount and have to repay it based on the receivables. The way these products work is, they take into consideration what invoices and receivables a business has outstanding along with the cash flow and revenue to determine a sustainable business line of credit. The process is relatively straightforward with approvals being issued in about 48 hours. In order to see if your company is eligible for an unsecured line of credit you have to submit the same application and bank statements as listed with spilt funding and revenue base factoring but you also must meet the criteria below.

What’s Needed To Qualify for Unsecured Lines of Credit?

  • You must be in business for at least 24 months
  • You must be a US Citizen
  • Must Be a LLC or Corporation
  • Generally you must maintain an average ledger balance of $1,000 in your business bank account
  • 620 + credit rating
  • 500k + in Yearly Revenue
  • 2+ years in business
  • LLC or Corp – no sol props
  • 670+ FICO
  • $500K+ in yearly revenue
  • Industries: no construction or “sin” industries
  • First position lien (can be second to one lien from bank / SBA / factoring / floor plan lien, and all equipment liens). Exceptions can be considered on case by case basis

What’s Paperwork is Needed To Qualify for Unsecured Lines of Credit?

  • A signed and completed application
  • Six months of recent business credit card processing statements (if you accept them at your business)
  • Six months of recent bank  statements
  • Financial statements may be required from time to time.

 

 

Short-Term Loans

These types of unsecured business loans are created to help business owners fill immediate, short-term needs or cash flow issues. This type of funding is structured as a loan with predetermined payment schedules and amounts. With this type of funding its very important to review the contract as the language varies from institution to institution. Many bigger lenders may require a personal guarantee that can include assets. While some other lenders may include a limited personal guarantee that allows the lending institution to go after personal assets in cases where fraud is committed. In many cases it is very hard to prove fraud but in a business where the service is money the lenders use this language as a way to protect themselves against potential fraud.

This type of loan doesn’t require a lot of paperwork, funds quickly, and can be used for almost any business purpose. Short-term loans are perfect for purchasing inventory, filling gaps between accounts payable and receivable, as well as any emergency repair or maintenance expenses that may pop up. These loan products generally have repayment terms of 3 to 24 months.

 

What’s Needed To Qualify:

  •  Completed Application
  •  4 months of most recent bank statements
  •  4 months of most recent processing statements
  •  Minimum of 2 months in business
  •  Minimum of $7,500 in monthly revenue
  • Funding over $75,000 may require additional documentation
  •  Most recent business tax return
  •  P&L
  •  Balance Sheet

As the alternative lending space is developing and expanding new unsecured business loans are constantly being created. This does not encompass all unsecured business loan products but covers a majority of what we see being utilized by small business owners.

Most business owners do not realize that they can obtain funding without collateral or personal guarantee’s. When it comes to taking unsecured business loans any person should highly consider the risk of not being able to pay it back. As most business owners know the old saying “no risk, no reward” but you shouldn’t be forced to pledge personal collateral to try to get the reward of succeeding in business. In this day and age with technology constantly changing and underwriting guidelines being developed by big data funding is sometimes only a click a way!

See what your business qualifies for

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