Home Business When Should You Consider An Unsecured Loan For Your Business?
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When Should You Consider An Unsecured Loan For Your Business?

by Finance Corner

Cash is critical to keeping your business alive. At specific points, you will need additional funds to secure a project or for business expansion. In such circumstances, unsecured business lending may prove to be perfect for your needs.

In this article, you can get a brief introduction into unsecured loans for your business, how they operate, and whether they will benefit your business.

What is an Unsecured Business Loan?

Photo of small business checking their finances and considering a business loan

An unsecured business loan is borrowing that doesn’t require any of your business assets as security. This situation contrasts with a secured business loan, which does require security. Unsecured loans require the lender to take on more risk because they have nothing to guarantee them getting their money back. This increased risk results in unsecured loans tending to be issued for smaller amounts and shorter durations. In this regard, they are structured similar to personal loans, but for businesses.

Could You Benefit From An Unsecured Business Loan

Unsecured business loans are suitable if your business needs a quick injection of cash. If your company has no assets, then an unsecured business loan can be a good source of funds, when no other loan options are available.

The types of businesses that generally benefit from unsecured business loans include the following:

  • Small businesses in need of a capital injection to purchase equipment.
  • Recent start-ups that have no or few assets, and need cash to fund rapid expansion.
  • Software companies, consultancy firms, and other intangible asset-based businesses, with few tangible assets.

Advantages and Disadvantages of Unsecured Business Loans

Unsecured business loans, like any other source of borrowing, have advantages and disadvantages.

Advantages

  • Speed. Unsecured business loans are a speedy way of getting cash injected into your business. From application to receiving funds only takes a few days, and involves minimal paperwork.
  • Convenience. Having one, or several, of your business’ assets tied to a loan can be restricting and cumbersome. As unsecured business loans don’t require assets as security, they offer more freedom, and the ability to catch opportunities at short notice.
  • Accessibility. If your business has exhausted other borrowing options, you may still be able to access an unsecured business loan.

Disadvantages

  • Expense. Due to the risk for the lender, unsecured business loans have higher interest rates, so they are more expensive.
  • Potentially Inappropriate. The ease of applying for an unsecured business loan means that these can often be applied for in error. Very often, a bank temporary overdraft facility is a more suitable and cheaper funding option for some businesses.
photo of business owner on laptop considering unsecured business loan

How Easy Is It To Apply For Unsecured Business Loans?

Being accepted for unsecured business loans is not guaranteed. Financial institutions are responsible to their shareholders and have to abide by financial regulations for mitigating the risks of lending.

When you apply for an unsecured business loan, specific criteria can help your application, such as:

  • Credit History. You will need to demonstrate a satisfactory history of making repayments. This evidence will go a long way to satisfying a lender’s appetite to risk.
  • Proven Repayment History With the Lender. If you have a previous history with the lender, it will remove a lot of the hesitation that lenders might have. Having defaults or a lack of funds on your application will make lenders nervous about lending to you, particularly if you are an unknown entity.
  • Sound Financials. Displaying strong financial statements will go a long way towards securing funding through an unsecured business loan. With having no assets as security, lenders will want peace of mind that your financial standing is sound.

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