What Are Unsecured Business Loans | Definition

Unsecured business loans are loans that are not covered by a company’s collateral. This means that in the event of liquidation, the loan will likely be worthless. For this reason, unsecured business loans are often called air-ball loans in that there is nothing hard to collect upon. While unsecured business loans may indeed lack hard collateral, they can be healthy cash flow based loans. In fact, unsecured business loans can often be less risky loans than secured business loans for the simple reason that the company may have strong cash flow.

Today’s growing businesses often have strong cash flow margins yet little assets on the balance sheets. This creates a conundrum for a bank when deciding to make a loan because banks need to have a sufficient amount of accounts receivable, inventory or fixed assets to collateralize the loan in full. To a banker, unsecured is often a bad word.

Yet many companies cannot help the fact that their capital needs may outstrip their asset base. These companies often are valued on an EBITDA multiple basis. Unsecured business lenders such as mezzanine lenders are a great option for these types of companies in that their lending methodology is based upon an EBITDA multiple of the borrowers, not its asset base.

These lenders are very smart and see that the ultimate test of creditworthiness is whether a company has cash flow, not assets, to repay the loan over the loan term. Unsecured business loans are critical to jumpstarting a company’s growth. These loans often fund the risk capital portion of a new project that can lead to significant business growth. The best part about unsecured business loans is that they provide a low cost way for a company to achieve long term growth. Loans are better for a company than bringing in a new investor and having to give up shares.

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