Short-Term Unsecured Business Loans Explained

That question can be answered in three words: emergency or opportunity. What do they have in common? Time. When time is of the essence, short-term unsecured business loans can save the day. Why? Because they can fund in as little as 24-48 hours. Banks can’t offer you that type of turnaround for their term loans, lines of credit, or SBA loans.

There are so many types of emergencies and opportunities that could arise in the course of operating a business. Below are a few examples, and don't hesitate to call (310) 536-0046 with any questions.

1) You’re a restaurant owner in Miami and your AC system goes out in the middle of summer. It’s been repaired one too many times already and you’ve been told that you’ll have to purchase an entirely new system… a cost you were not counting on. (And don’t forget about the cost of installation and permits!) You need a short-term unsecured business loan.

2) A flood occurs in your warehouse due to a broken pipe, and a lot of inventory was damaged. It needs to be replaced immediately, and repairs need to be made while you wait for the insurance to kick in and reimburse you. You need a short-term unsecured business loan.

1)  You own a restaurant in a strip mall and have always had your eye on the space next door to you so you could expand your dining area. One day you find out that the owner of that business is retiring. His kids aren’t interested in the business, so he’s closing his store and the space will soon be available. 

Time is of the essence if you want to make sure you get that space. However, you didn’t plan or budget for any of this, and you don’t know where you are going to come up with the money to cover the cost of the additional lease, an architect, construction costs, new dining area furniture, and additional kitchen equipment. You need $125,000 and you need it now. You need a short-term unsecured business loan.

2)  You have an IT company and own your own servers. The opportunity arises to take on a huge new client who wants to switch to you immediately, but for that you need to purchase a new server right away and hire an additional employee to manage the new client’s account. 

Unfortunately, your line of credit with your bank is maxed out and you don’t have a spare $150,000 in your budget for this. You need a short-term unsecured business loan.

It’s important for borrowers to be realistic about the size of loan they may qualify for. Although there are many parameters that underwriters consider when evaluating both a business and the borrower/s before they finally arrive at an actual loan offer, a good point of departure when trying to guestimate the maximum amount that a business might qualify for would be to simply to calculate 10% of the business’s gross annual income. At the end of the day, it may end up being more than that, or less, but it’s a good rule of thumb to use to avoid dissapointment.

Short-term unsecured business loans are cash-flow loans, meaning they are underwritten with the borrower’s daily cash-flow in mind, to try to ensure that payments are ‘doable’. Ethical lenders do not want to give loans that borrowers can’t repay... that would help absolutely no one… not the borrower and not the lender.

The biggest question to ask yourself, with any loan, is can I afford the payments? This is precisely the question the lender is asking itself about you when underwriting your request for a loan. Short-term unsecured business loans are repaid over a very condensed period of time. That’s why when trying to determine if you can afford a particular loan, the rate is not the most important thing to consider… the payment is.

The biggest myth about unsecured business loans is that they are more expensive than bank loans. They are not, when you take into account the difference in the repayment times. 

The true cost of a loan is the actual amount of cash it costs you. Consider the fact that $100,000 mortgage, amortized over 30 years at 5% interest, will cost you $93,256 in interest if you take the entire 30 years to pay it back. That’s almost as much as the original loan amount itself. 

Short-term unsecured business loans are typically not amortized, nor are they annualized. They run independent of time. So a loan for $100,000 at 5% simple interest, paid back over 12 months (truly short term) will cost $5,000 in interest. Even if it was a 14- or 18-month term, it would still only cost $5,000 in interest. However, as you might have guessed, you will not find a short-term unsecured business loan at 5% interest. The rate will be much higher, because the loan is unsecured.

The takeaway here is that just because a short-term unsecured business loan may have a higher rate than a bank loan, that doesn’t automatically translate to a higher out-of-pocket cost to the borrower when factoring in the element of time. 

Why are short-term unsecured business loans written for such short periods of time? As the name indicates, these loans are not secured by collateral, which means that the lender carries all the risk. Statistics show that the longer the term, the higher the chance of a default. So lenders are simply trying to lower their risk.   

Buy why daily rather than monthly payments, you may ask? Because it’s more doable that way. It’s easier to chip away at the debt bit by bit. It’s the same principle behind many of the anecdotes we learned as children, like: 'slow and steady wins the race', or 'a journey of a thousand miles begins with a single step'.

Lenders putting out large sums of money with no collateral don’t want to wait until the end of each month and hope that the borrower has enough money left over to make the payment. So they take their repayments in smaller increments, typically, Monday through Friday, via direct debit.

Occasionally lenders may offer weekly payments, but the norm is daily.

Consider the fact that a $100,000 loan with NO interest, paid back within a year, would still take a 

chunk of change out of a borrower's bank account every month ($8,333.33, to be exact). But daily payments of $379 (M-F) might be OK. Even over a two-year term, monthly payments would be $4,166.67, but daily payments would only be $189. Doable for a short period of time.

As mentioned previously, short-term unsecured business loans are not amortized or annualized. The rate is the rate, regardless of the term of the loan, whether it’s a 6-, 9- 12- 18- or 24-month term. So what would be called an interest rate in the banking world, is not really an interest rate when it comes to short-term unsecured business loans.

Instead, the lenders of short-term unsecured business loans use what is known as a "factor rate". A factor of 1.25 means that for every $1.00 borrowed, the borrower will repay $1.25. Here’s an example:

On a $50,000 short-term unsecured business loan written at a factor rate of 1.25, the borrower’s payments will total $62,500 at the end of the loan term, meaning the borrower will have paid back the original $50,000 loan PLUS $12,500 in interest. 

Whether the term is for 9 months, 12, 14, 18, or 24 months, the cost of the loan is the same… $12,500. What will vary is the daily payment amount, depending on the number of days the $62,500 is divided by.

It may seem like a lot of money to pay for the use of the $50,000, even on short notice, and for such a short period of time, but the more important consideraton is: what will the borrower lose in future earnings if he or she misses out on the opportunity at hand? And in the case of an emergency, what will it cost the business owner to be temporarily closed while waiting for a lower-cost bank or SBA loan (assuming he/she can even qualify for one)?

Believe it or not, these types of loans can be written for much larger amounts, as long as the borrower’s daily cash flow supports the payments. Rates could be lower or higher – it depends on a number of parameters.

If you want to compare the true cost, in dollars and cents, of different types of loans with different rates and terms, check out the figures below.

60-month term (5 years)

BANK TERM LOAN, amortized

$100K

14% interest

$2,326.83 monthly payment

$39,609.51 total interest paid

120-month term (10 years)

BANK TERM LOAN, amortized

$100K

14% interest

$1,552.66 monthly payment

$86,319.72 total interest paid

____________

12-month term (1 year)

SHORT-TERM UNSECURED BUSINESS LOAN, simple interest

$100K

1.25 factor rate

$473.48 approx daily payment (M-F, 22 days/mo, 264 days)

$25,000 total interest paid

12-month term (1 year)

SHORT-TERM UNSECURED BUSINESS LOAN, simple interest

$100K

1.40 factor rate

$530.30 approx daily payment (M-F, 22 days/mo, 264 days)

$40,000 total interest paid

18-month term (1.5 years)

SHORT-TERM UNSECURED BUSINESS LOAN, simple interest

$100K

1.25 factor rate

$315.66 approx daily payment (M-F, 22 days/mo, 396 days)

$25,000 total interest paid

18-month term (1.5 years)

SHORT-TERM UNSECURED BUSINESS LOAN, simple interest

$100K

1.40 factor rate

$353.54 approx daily payment (M-F, 22 days/mo, 396 days)

$40,000 total interest paid

24-month term (2 years)

SHORT-TERM UNSECURED BUSINESS LOAN, simple interest

$100K

1.25 factor rate

24-month term (2 years)

$236.74 approx daily payment (M-F, 22 days/mo, 528 days)

$25,000 total interest paid

24-month term (2 years)

SHORT-TERM UNSECURED BUSINESS LOAN, simple interest

$100K

1.40 factor rate

$265.15 approx daily payment (M-F, 22 days/mo, 528 days)

$40,000 total interest paid

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