There are dozens upon dozens of small businesses that open every day. Each is unique and carries its own specific set of strengths and weaknesses. However, they all have one major thing in common: they will all have the need for capital. Going to a traditional bank or a credit union used to be the only option small businesses had to access working capital. This is no longer the case. With the rise of alternative lending, there are now numerous options to consider before moving forward to obtain capital. One such option is an unsecured business loan.

What is an Unsecured Business Loan?

An Unsecured Business loan is a loan that is not usually backed with collateral. Lenders who offer unsecured business loans won’t require your business to put up any assets as collateral to obtain the loan. That means there are no risks to existing assets like homes, vehicles or commercial property. Traditionally, to be approved for an unsecured loan, you as the borrower must have great credit history. Alternative lenders will still often overlook poor credit history and charge higher interest rates in lieu of a credit based decision.

IMPORTANT: Just to make it clear from the start, unsecured business solutions are not free for you to use arbitrarily. You, the borrower, have to pay your lender interest or some sort of fee for access to capital.

Let’s go over the multitude of solutions that unsecured financing has to offer:

Working Capital Loans

Working Capital Loans are the most commonly sought out type of financing product. They are, in essence, designed to help meet short term financing needs. This can include inventory purchases, business expansion or really any crucial business expenses. Most lenders will consider your credit score, time in business and cash-flow metrics to determine whether you, as the business owner, will be able to obtain financing. Repayment is made simple with a fixed term and fixed automatic daily or weekly remittance. Keep in mind that working capital loans are paid back over a much shorter time frame than traditional loans (anywhere from three to 18 months). This means it may have a higher impact on your cash-flow, while paying back the loan.

Business Line of Credit

A business line of credit is an unsecured loan that businesses may use without having to go through the process of applying for a loan, each time they need capital. As the owner of a small business, it is necessary to have access to cash when you need it. That’s why this type of financing is a great option to offset the ups and downs in your business. The advantage of a business line of credit is that you are not required to use the funds until they are needed. Also, you are only charged interest when it is used. One of the biggest advantages of this type of financing is that it will report directly to your business credit, allowing you to build your credit score while getting the funds you need. Most lenders will require the possession of a business checking account, proven financial history of two or more years, and a credit score over 650. The downside is that it’s much more difficult to qualify for this type of credit. If you aren’t the most qualified borrower, or you need fast access to financing, short-term working capital loans may still be the way to go when the immediate need for capital arises. Speaking of credit, 37 percent of American adults admit they do not know their credit score. Don’t be a part of this statistic, know your credit.

Invoice Factoring

Probably the oldest method of financing, invoice factoring (also known as A/R financing), is the selling of purchase orders or accounts receivables for immediate funds. In its truest form, factoring isn’t really a loan as much as it is the sale of an asset. This tool allows you, as the business owner, to receive capital in the event you are owed money for services completed. This is valuable when a contract for products or services is received, but the business lacks the cash to fulfill on the contract. In some industries, like textiles, it remains the financing vehicle of choice.

An invoice financing agreement is ideal for businesses needing funding to cover expenses when working capital is tied up until customers pay invoices. The key benefit is that it is treated as a transaction, rather than a loan. This means no debt is incurred and the processing time is much shorter. Depending upon your customer base and the state of your account receivable, factoring is usually much easier and faster than a conventional loan.

Equipment Financing

Equipment financing is a solution that helps you pay for the new or used equipment your business needs over time, instead of fronting the entire cost of your equipment in one purchase. A business equipment loan is very similar to an auto loan, where the purchased item itself acts as collateral. Because of this, lenders are sometimes more willing to offer these types of loans and qualifying for them can be relatively easy.

Equipment financing helps business owners acquire equipment that would normally be too expensive to buy with cash, in a much shorter period of time. This is a great option for companies that want to grow their revenues with a certain tool or piece of machinery. Approvals are typically based on credit score, years in business, financial history and value of the equipment itself. If you have a business that works within a specific industry like construction or agriculture, keep this in mind when searching for a financing company. Often times, these lenders will specialize in particular industries so going with a company that specializes in what you do is key!

Merchant Cash Advance

A merchant cash advance (MCA) is not a loan, but rather an advance based upon the future revenues or credit card sales of a business. Basically, you as a small-business owner are selling a portion of future revenues or credit card sales to acquire capital immediately. Most providers form partnerships with payment processors and then take a fixed or variable percentage of a merchant’s future credit card sales. Each day, an agreed upon percentage of the daily revenues or credit card receipts are withheld to pay back the MCA. The hold-back is typically based on the amount of funds your business receives, your monthly receivables and the time it will take to repay the advance. Because repayment is based upon a percentage of the daily balance in the merchant account, the more transactions a business does, the faster they’re able to repay the advance. This structure has some advantages over the structure of a conventional loan. Most importantly, payments to the merchant cash advance company fluctuate directly with the merchant’s sales volumes, giving the merchant greater flexibility with which to manage their cash flow, particularly during a slow season. Also, because MCA providers like typically give more weight to the underlying performance of a business than the owner’s personal credit scores, merchant cash advances offer an alternative to businesses who may not qualify for a conventional loan.

What’s Next?

Only about 34 percent of small businesses receive funding through a bank. So, a conventional bank loan is not the end- all, be all for small business financing. Getting declined by your bank can be discouraging, but it doesn’t mean your business is destined to fail. When it comes down to it, securing a bank loan for a business is tough! Even though credit unions have twice the approval rate of big banks, they still only work with more established businesses. Sometimes you just need extra capital to grow your business. If you’re not willing to give up equity in your company or don’t qualify for conventional bank loans, then taking on an unsecured business funding solution could be the way to go.