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Because start up businesses tend to be less likely to have valuable assets in the event of default on a start-up loan, and because flexibility in spending actually helps new entrepreneurs churn the initial profit, loans for new businesses are often considered unsecured. What an unsecured business loan means is that the loan is not backed by collateral, as is the case with most property loans. Instead, money is often given out as a lump sum that can be spent at the borrower’s discretion, and is paid back on a fixed, amortized schedule.
Like business lines of credit and business credit cards, an unsecured business loan is based on business credit rather than personal credit, meaning that you must first be registered with an EIN number for your business, have a separate telephone line and bank account for the business, and have a file with the three business reporting bureaus. Credit for these loans is built primarily with small loans, business credit cards, and vendor credit lines.
An unsecured loan can be used for almost anything including equipment, expansion or advertising. Typically these loans are small; new start-up business loans are typically about $25,000. Because the loans are both unsecured and often given to people with low business credit, banks are very cautious about whom they lend to and the interest rates are typically high. Unsecured business loans for existing companies are much easier to come by after the company has existed for at least two years and has a high (680 or more) credit score. As is the case with most other loans, there are many competitive lenders online, and the most reliable ones can be found with a little bit of judicious hunting.