Debt isn’t inherently good or bad, it’s a tool.
Used intentionally, it can stabilize cash flow, support growth, and give a business room to breathe. Used carelessly, it can erode margins and flexibility.
One of the most common, and most misunderstood, tools in a company’s capital stack is unsecured debt. Because it doesn’t require collateral, it’s often the easiest to access and the hardest to manage well.
Before using it, or increasing reliance on it, it’s worth understanding exactly how unsecured debt works, where it fits best, and where it can create hidden risk.
Unsecured debt is any obligation not tied to specific collateral such as real estate, inventory, or equipment. Instead, lenders rely on the borrower’s creditworthiness, financial strength, and cash flow to determine risk. Because there’s no asset to repossess, unsecured debt usually comes with higher interest rates and tighter terms.
Common forms include:
- Revolving Credit Facilities (Revolvers): Business credit lines that can be drawn, repaid, and redrawn—acting as a cash buffer for working capital needs.
- Lines of Credit (LOCs): Similar to revolvers but may be personal or business; often unsecured unless tied to an asset like a home (in which case it becomes a HELOC).
- Credit Cards: The most familiar unsecured credit tool, both consumer and corporate.
- Unsecured Business Loans: Term loans without collateral, often higher cost and shorter duration.
Advantages of Unsecured Debt
- Flexibility: Draw what you need, when you need it (especially with revolvers and LOCs).
- No Collateral at Risk: You don’t have to pledge assets like real estate or equipment.
- Speed: Credit cards and LOCs are generally faster to obtain than secured financing.
- Cash Flow Support: Bridges gaps between payables and receivables, helping smooth operations.
Risks and Downsides
- Higher Interest Costs: Since lenders take more risk, rates are higher than secured loans.
- Credit-Dependent: Strong credit history and financials are required to qualify.
- Variable Rates: Many revolvers and LOCs are tied to floating benchmarks (e.g., SOFR + spread), which can climb quickly.
- Personal Guarantees: Even if “unsecured,” lenders often require the owner or executive to sign a personal guarantee—putting personal assets indirectly at risk.
- Debt Spiral Potential: Easy access can encourage overuse, especially with credit cards.
Best Practices
Match Debt to Purpose: Short-term tools (like revolvers) should fund short-term needs, not long-term investments.
Monitor Utilization: Consistently maxing out an LOC or credit card is a warning sign.
Negotiate Terms: Revolvers and LOCs often come with fees (commitment fees, unused line fees, annual renewals). Push for favorable terms.
Maintain Cushion: Always have capacity available—don’t wait until the line is fully drawn to seek more credit.
Prioritize Repayment: Because unsecured debt is costly, it should usually be the first debt repaid when cash improves.
Bottom Line
Unsecured debt is powerful when managed correctly. It provides flexibility, liquidity, and speed. But it’s also expensive, risky, and easy to misuse. As a CFO, or an individual, view unsecured debt as a bridge, not a foundation. Use it to manage timing gaps or short-term needs, not as a permanent solution.
Like any tool, unsecured credit can build or destroy, depending on how you use it.
About the Florida CFO Group
As a fractional CFOs, The Florida CFO Group works with small and mid-sized businesses to design capital strategies, navigate lender relationships, and ensure financial stability. Whether you’re considering your first loan or refinancing existing debt, we help you make confident, data-driven decisions.
About the Author
Tim Fischer is an entrepreneur and seasoned CFO who helps small business owners navigate complex, ambiguous challenges. With a practical, results-driven approach, he partners with leaders to clarify decisions, strengthen financial strategy, and identify the most profitable path forward.
Contact Us
If you have any questions or would like to discuss your organization’s finance and strategic management needs, please call the Florida CFO Group at 1-877-352-2367 or send us a message. We are here to help you navigate your financial challenges and achieve success!