What Is Unsecured Business Finance?

"Unsecured business finance" is a term used to describe various methods of obtaining financial resources that may be utilized for ongoing business operations or even establishing or growing a business. At times, this type of financing option is used to help a company deal with short-term decreases in cash flow, such as when the goods and services manufactured by the company experience a decrease in demand due to seasonality. Depending on the nature of the financing need, unsecured business finance may also be used to fund expansion projects that will take years to manage or be a solution that makes it possible to continue operations until anticipated revenue is received, allowing the debt to be retired.

While there are a number of ways to obtain unsecured business finance, two of the more common approaches are business loans and the establishment of a business line of credit. With the former, the company will obtain a loan from a lender or even a group of venture capitalists, with the arrangements including clear terms for repayment. When the purpose for the loan is to manage the expenses with an expansion project until that project can begin to turn a profit, the repayment terms may include a combination of providing a portion of the principal to the lender along with paying interest and maybe even providing the lender with shares of stock.

Unsecured business finance in the form of a line of credit allows businesses to easily obtain the money needed immediately and then repay the debt according to the terms associated with the credit arrangement. One simple application of a line of credit has to do with managing daily operational expenses. In this scenario, a company pays its creditors using the line of credit, then pays off that balance at the end of the month once the business has received payments on outstanding invoices from its clients. This approach makes it possible to position the debt owed to vendors and creditors so payments are made on time and are not subject to additional penalties and interest charges. When the amount borrowed on the line of credit is paid off quickly, this can often mean little to no interest accrued, which further enhances the way the business manages its finances.

In any form, unsecured business finance does not require the pledging of any type of collateral. This means none of the assets of the company are subject to claims made by lenders in the event that the business should default on the financing arrangements. Typically, any company seeking some form of unsecured business finance will need to convince lenders that the company presents what lenders consider an acceptable level of risk before any type of financial support is obtained. Should the lenders determine the level of risk is too great, offers of some sort of secured business finance may be presented instead.