When you’re in business, you soon start noticing that cash flow plays a fundamental role in keeping everything going. At times, you may need funding to secure an additional project or to expand your business. An unsecured business loan could be perfect for that purpose.
Let’s take a look at what unsecured business loans are, how they work, and whether you’re in a position to benefit from one.
What is an unsecured loan?
In contrast to a secured business loan – which is backed up by security, usually the assets your business owns – an unsecured loan doesn’t require company assets as security.
With an unsecured loan, there’s more risk for the lender as they have no guarantee of getting their money back. As a result, these loans tend to be for smaller amounts and take place over shorter periods of time. They essentially work like a personal loan, but for a business.
Who could benefit from these loans?
Businesses that need a speedy cash injection, where the amount is not too big, might consider an unsecured business loan. It’s also a handy source of finance for those who don’t have the assets to back any other type of finance option.
Businesses that could benefit from an unsecured business loan include:
- Small companies looking to get a new business off the ground with the purchase of equipment.
- Recent start-ups with few significant assets that are growing fast and need access to finance to ensure expansion keeps up with demand.
- Businesses based on intangible assets, such as software or consultancy companies. that might only use a rented office and a few computers.
What are the benefits and pitfalls?
As with any loan product, there are advantages and disadvantages attached to unsecured business loans.
Benefits
- Fast: An unsecured business loan is one of the fastest ways to inject cash into a business. Usually resolved in just a few days, these loans also require the least amount of paperwork.
- Convenient: For a business, having an asset tied to a loan can be cumbersome or, in some cases, impossible. Unsecured loans do not require assets as security. Businesses can access the funding they need to avoid missed opportunities.
- Accessible: Businesses that haven’t built up enough assets suitable to secure a loan can access funding.
Pitfalls
- Expensive: Even with small unsecured loans, banks still carry the risk that the customer might not repay the loan. One of the ways to mitigate this risk is to increase the cost of credit. Unsecured business loans often carry higher interest rates than secured loans.
- Umbrella product: When it comes to cash flow management, it’s easy to go for the product that offers the least resistance in the application process. This could result in applying for the wrong product. An unsecured business loan is a term loan that has a set number of repayments over a period of time, usually between 12 to 60 months. If, for instance, the cash injection is a temporary need that simply requires cash for a period of time. An overdraft (or even temporary overdraft) might meet the need more effectively.
Are these loans easy to get?
Financial institutions have a responsibility to their shareholders and an obligation under various financial governing bodies to control their risk. An applicant hoping to access an unsecured loan will need to satisfy certain criteria, such as:
- Superb credit history – Lenders will need to satisfy their risk appetite somehow. A strong repayment history is likely to help significantly.
- Strong history with the lender – Defaults on an applicant’s current account and insufficient funds for transactions can make a lender nervous. They may not want to extend unsupervised credit unless there is a strong motivation.
- Satisfactory financials – Lenders can pick up small alarm bells on the financial statements. These would indicate to them whether extending credit will make the situation worse. The company’s balance sheet will indicate whether there are liquidity issues and if the finance is just plugging holes. It will also highlight whether the business is solvent. Both of these factors are important considerations for finance.
