Unsecured Small Business Loans: Avoiding Undercapitalization

By: Alfred Anderson

Every business day, many ambitious entrepreneurs begin new businesses, while on the other hand many others shut down their loss making concerns. The probability of a small business failure is relatively high primarily due to some wrong business decisions made by the aspiring entrepreneurs. The worst kind of small business failure is undercapitalization that is characterized by a state of bankruptcy due to lack of sufficient operating capital. A business can slip down to the state of undercapitalization due to a variety of reasons like market competition, management mistakes, bad business location, loss of profit generating clients, creditor disputes, personal problems, and even calamities involving natural disasters and accidents. However apart from all these reasons, lack of proper financial planning primarily leads to the state of undercapitalization.

Success of a small business relies on a strong foundation of proper capital planning. Improper financial planning can easily pull down a small business concern to a state of under capitalization. In order to avoid this, the small business owners should plan out a proper funding strategy for their venture.

Opting for an unsecured small business loan could be a very good financing proposition. These loans are offered without any security or collateral whatsoever. The character and reliability of the applicant can only ensure the availability of such a loan. As these loans are not guaranteed with an asset, the risk of repossession is nonexistent in this case. Typically these loans are in form of credit card debt, bank overdrafts, personal loans, corporate bonds and credit facilities on lines of credit.

The rate of interest charged on an unsecured loan is significantly greater than that of a secured loan. This is primarily due to the fact that an unsecured loan translates into a greater risk burden on the lender.

Small business owners can also go in for an unsecured cash advance to fund their business ventures. Unlike secured loans an unsecured cash advance does not require a collateral or a security. The unsecured cash advance system of funding is repaid on the basis of future credit card receivables. Other forms of payments, in form of cash and checks are not utilized for repayment purpose. The primary advantage of an unsecured cash advance funding system is its usefulness in meeting the working capital requirements of small business owners.

The kind of funding system to opt for varies from person to person. It depends purely on their business goals and capital adequacy. However repayment plans calculated on a higher interest rate as in the case of an unsecured small business loan is always difficult to maintain than the sales driven credit card receivable option provided by an unsecured cash advance system of funding. On this account, opting for an unsecured cash advance surely has an edge over other types of business funding schemes.

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