Unsecured Credit

Unsecured credit is credit extended without collateral and without the borrower attaching specific assets in the event of default. It’s a form of credit that allows both individuals and businesses to obtain financial support from a bank without the use of such assets as office equipment, inventory, stock and bonds, company cars or real estate. Consumers have unsecured credit in the form of credit cards, but pay for the risk through higher interest rates. However, the remainder of this discussion will focus on unsecured credit for businesses.

When businesses have certain financial difficulties with cash flow problems, unsecured credit gives them a bit of hope and a great degree of flexibility. And the need for an instant cash infusion – for acquiring raw materials, expanding the business, etc. – can arise in any business. Even though unsecured credit can get a lot of businesses out of a jam, they must still meet certain criteria in order to receive a line of credit or lump sum amount. It is particularly difficult for new or small businesses to get unsecured credit in times of economic contraction, such as the world saw commence at the end of 2008.

Credit – and how to get it

A company must have established credit references and good scores on either standardized or lender-specific rating systems. Without good credit, it’s most likely that a new, small or undercapitalized company will be turned down for unsecured credit. Lenders assume much greater risks by making loans without some form of security (collateral), and businesses without positive credit scores, reports and references will have a hard time convincing a lender.

In fact, being unprepared at a loan application meeting will make a company seem like it is not well established or well managed. Most lenders in that situation will not consider such a firm to be worth the risk. In today’s credit market lenders are going to be choosier than ever, for both businesses and individuals. In order to qualify for unsecured credit, a business will have to have a good, solid business history, excellence trade references, good credit scores and top ratings from such firms as Dun & Bradstreet. Having a long-term relationship with a lender will play a major role in getting an approval.

Credit where it’s due

An unsecured line of credit is the perfect financing for your business to ensure you make payroll on time, pay your vendors promptly to avoid penalties or increase marketing initiatives to bring in more business. Unfortunately, it is not going to be so easy to obtain, what with all the economic turmoil that began with the banks and automakers at the end of 2008.

The best advice for a business concerned about the availability of unsecured loans is to keep improving the firm’s efficiency. Cut waste, reduce overhead, trim all excess spending, renegotiate vendor contracts and improve operations wherever possible. The morale of employees is very important, as well, so be positive, but honest, about why the changes are being instituted. For many companies, the choice is between learning how to compete and succeed in new ways, or going out of business the old-fashioned way. If you can get it, unsecured credit, properly handled, can make the difference as to which of these two routes you and your business will take.