Small business owners just starting a new business may not have the collateral or credit history required to obtain a traditional business loan. There are several options available to obtain unsecured financing, but some options, such as the United States Small Business Administration Patriot Loan, dictate the borrower meet certain requirements. Also since unsecured credit lines can involve borrowers with a less than perfect credit history, the interest rates and terms may not be as favorable as traditional bank loans.
SBA Patriot Loan
The SBA Patriot Loan is a program designed to offer retired military personnel the opportunity to obtain start-up financing for their business. The SBA offers the loan programs through participating lenders who evaluate the credit history of applicants and their credit score. The participating lenders will also consider the type of business and how long the business is in operation. The Patriot Loan is an unsecured variable rate loan offered in amounts from $5,000 to $50,000 depending on business need. The term is seven years and is fully amortized for the life of the loan. Certain types of businesses are excluded, such as non-profit organizations and real estate investment.
Revolving credit is another way for small business owners to begin operation if there are minimal start-up capital needs. Maintaining a business credit card or credit line may also offer the flexibility for ongoing operational capital and for smaller equipment purchases without having to apply for individual credit lines in the future. Since credit cards and revolving credit lines often charge higher interest rates, reliance on these programs as large dollar start up capital may hurt the future cash flow of your business. Though requirements to obtain revolving credit may be lower than collateralized loans, applications for revolving credit lines can require a good credit history and credit score.
The United States Small Business Administration offers CAPLines to small business owners to help meet ongoing short-term and seasonal operational funding needs. There are five different CAPLines, each applicable to specific financing needs. Seasonal Lines is designed to meet regular seasonal increases in expenditures businesses may encounter, such as seasonal peaks in inventory and labor costs. The Contract Lines and Builders Lines loans are for meeting the demands specific business contracts may place on a business for materials, or labor costs for builders or manufacturers. Two Asset Based Lines center on helping small businesses with capital purchases. The Asset Based Lines are often used by businesses that extend credit to other businesses. Though collateral is not required, those individuals in the business who own at least 20 percent of the business are normally required to guarantee the loan.
Private loans from family, friends or angel investors is a way to obtain an unsecured credit line without requiring the small business owner to obtain formal bank financing or high-interest revolving credit lines. The rates, terms and payment requirements can all be negotiated individually. In seeking this type of loan financing, the small business owner should treat family and friends as they would any outside investor or benefactor by offering their business plan and written loan terms. Angel investors can be similar to venture capital firms when financing is sought. Though interested in helping out your small business, they may ask for additional conditions and seek a higher interest rate in lieu of collateral or security.