A business may need asset finance from time to time to meet specific goals such as expanding the business, purchasing equipment, marketing, or managing cash shortages. A business loan is often the most appropriate option to meet these needs.
Unsecured guarantor loans offer a way out for borrowers with limited or bad credit histories. However, to receive a loan, it is necessary to secure a guarantor. This post will explain what these loans are so that you can fully understand this loan process.
What is an unsecured business loan?
To understand this type of financing, we need to explain what an unsecured loan is. All loans, whether personal or business loans, are either secured or unsecured. A secured loan requires collateral such as property, vehicle, and equipment.
If you apply for unsecured business finance, the lender does not take property or assets as security. There is no collateral backing an unsecured loan, so there is a higher level of risk for the lender. They can only trust your credit history. As a result, unsecured loans tend to be more expensive.
Additionally, unsecured loans consider your credit history, so lenders are less likely to approve borrowers with poor credit histories. However, a guarantor can change it.
What is a guarantor business loan?
A guarantor supports a borrower and agrees to take financial responsibility in the event of non-payment. This person could be a partner, friend, or family member. Your or someone else’s company can also be considered a guarantor. A guarantor should satisfy the following conditions:
- Have a strong credit history
- Financial stability
This person agrees to be liable if the borrower fails to pay. As a result, lenders do not charge higher interest rates to compensate for the risk profile of their primary borrowers. Guarantors can also help those with low salaries, low assets, or financial insecurity. Credit rating is an essential aspect in obtaining an unsecured asset finance loan, but salary and assets also play a role. Not all lenders will offer this as a solution, most private asset finance lenders will require security for the funding.
How does a loan guarantor work?
An unsecured business loan is a type of loan that is
2. Guaranteed by a financially stable person.
A loan that meets these two restrictions is an unsecured guaranteed loan. However, these options can be very limited through lenders. It may also be difficult to find a guarantor that will take over a debt if you fail to repay the loan.
It is important to note that the co-guarantor does not make it a guaranteed loan. A joint guarantor has different rights and financial obligations than a guarantor. For example, the guarantor becomes financially responsible only after the lender has exhausted all collection methods for the primary borrower. If the loan is secured by collateral, it is also considered a secured loan.
What are the benefits of an unsecured business loan?
Unsecured and guaranteed business finance offers a variety of benefits to borrowers. Some of these are as below.
1. Competitive price
As mentioned earlier, a secured loan reduces the lender’s risk. In return, the total loan amount will get reduced. Unsecured and guaranteed loans are expensive compared to other lending options for borrowers with lower credit ratings.
2. Loans are smaller
The relatively high risk profile of this type of loan may only allow borrowers to take advantage of smaller loans. Additionally, interest rates are often higher than other types of financing, such as secured business loans.
3. Stricter Lending requirements
There will much more documentation and conditions around this type of finance, due to the risks not many lenders will offer this type of funding.
4. No collateral is required
Instead of requiring collateral, the lender relies on the guarantor’s creditworthiness as proof that the loan will get repaid. If you do not have assets having a guarantor may be an option.
5. Increased chances of your application getting approved
Having a guarantor increases the security of the lender and the chances of your application getting accepted, only if the lender accepts a guarantee as security.
6. Improve your credit score
If you manage your credit on time, it should reflect your credit score. You can fix your bad credit history by paying off your loan on time. Many lenders also offer the option of overpaying or repaying the loan early at no extra charge, allowing you to reduce your loan term and overall repayment costs.
7. Suitable for people with poor, little or no credit history
Guaranteed loans are an option for those with poor credit as they allow those with a bad credit history to secure funding, it is not a common option available in the market. Private lenders are a better option to secure funding for your business.
Asset finance loans are an alternative option if your credit rating is impaired. If you have equity in real estate this can be used without the need for a guarantor and the lending criteria is much quicker and easier with funding available in as little as 24 hours.