Unsecured business finance is a type of loan which does not require any collateral like assets or properties to secure the funding. It is for those who want to expand their business and make the necessary development but do not have enough property to put up collateral.
When you offer a property as collateral for funding, it is called secured business loans. Small business owners or start-up companies cannot always obtain secured business loans if there is lack of equity, and unsecured business loans are then an alternative.
Why do Business Owners Need Unsecured Business Finance?
Whether a business owner needs unsecured business finance or not depends on several aspects, such as business goals, cash flow needs, and more. If the need for funding is urgent, then unsecured business finances could be the best option for you. Below are a few reasons why business owners can opt for unsecured business finance.
- Every borrower does not own collateral like any assets or properties to put against secured finance.
- If a borrower needs quick funding and is ready to pay the loan amount within a short time frame.
- A borrower has a business opportunity that is too good to miss, like purchase of cheap stock.
Benefits and Drawbacks of Unsecured Business Loans
If you are thinking about unsecured business funding, it is vital to check both sides of the loan, benefits, and cons. Though the benefits are remarkable and worthy, there is also another side of the coin, the disadvantages. After all, it is a small business loan. If you are securing a deal, make sure it meets your needs. Always do your part of the research, and then make a decision considering every aspect.
Here are some advantages and disadvantages of unsecured business finances. It will assist you in deciding whether unsecured business finance is suitable for you or not.
Benefits of Unsecured Finance
1. Shorter and Easy Application Procedure
In the case of secured business loans financed with mainstream banks and lending institutions their process can be lengthy and time consuming as there are a lot of conditions that you would need to meet before the funding is provided.
On the other hand, you can obtain unsecured business finance within 24 hours after applying for the loan, and it is the quickest method ever, and businesses can get access to the funds they need quickly. For them, unsecured business finance is the best choice.
2. Collateral is not needed
Not all businesses own valuable assets to offer as security for business funding. For instance, a relatively new company or business usually lacks business assets, and they will not fulfill the primary criteria to acquire a secured business loan.
But in unsecured business finance, there is no need for collateral. Instead, lenders focus on other important aspects such as monthly turnover to meet the criteria and get approved for the loan.
Since you do not have to submit collateral, the lender may ask for a directors guarantee to approve your application. It is an agreement where the lender will state in a legal document that if you cannot repay the loan, the lender will have a charge over the company and personal property.
3. No Risk of Losing Collateral
Secured business finance gets backed up by collateral. If the borrower fails to pay the amount, the lender will take possession of the property used as security. In unsecured business finance, the lender does not have any assets that they could take possession of.
As unsecured lenders use the turnover of the business to assess the loan they are assured that the business is making enough money to repay a loan.
Drawbacks of Unsecured Business Finance
1. High-Interest Rate
Lenders take risks while lending money to someone as there is no collateral in unsecured business finance. With secured business loans, there is a chance to recover the amount by seizing the asset. But in unsecured loans, there is no submitted property. That is why lenders tend to charge higher interest rates on unsecured finances.
2. Harder to Become Eligible
In unsecured loans, instead of collateral lenders, give attention to factors like
- Your credit score
- Business turnover
- Time in business
- Revenue flow projection
It is hard for a business owner with a bad credit score to be eligible to obtain unsecured financing. People with bad credit scores should opt for other business finance like a business credit card or secured finance. But qualifying for unsecured business funding is not always difficult, another thing you can do is wait till getting to a better financial position and apply then.
Conclusion
Though there are disadvantages of unsecured business finance, its benefits are attractive. When there is no choice left, only unsecured loans for businesses can assist you in growing your company. So if you fulfill all the criteria, do not hesitate to apply for an unsecured loan.