Businesses that are looking for a loan without collateral — should consider an unsecured business loan.
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What is an unsecured business loan?
An unsecured business loan is a loan that doesn’t require any security or collateral. A secured loan uses a company’s assets as security, thus should a business default on its loan — the lender can sell the assets to recoup some of the losses.
Unsecured loans — considerations
To consider a secured loan, a company would need to have collateral to offer. Businesses that don’t have any assets, can only consider an unsecured business loan. An unsecured business loan is a viable financing option for businesses that do not own many assets, business that prefer not to offer collateral, or any fast growing company that requires funding quickly.
In this day and age, many SME’s are based on intangible assets. So for example, a digital consultancy is likely only to work from rented office space and have a few computers to its name. Due to this lack of tangible assets, an unsecured business loan is more appropriate.
Due to the lack of collateral, when it comes to unsecured loans, your companies trading history is more important. Furthermore, as the risk to the lender is higher, the interest rates charged on unsecured loans can be high (when compared to secure loans).
Before being able to get an unsecured loan, banks may ask for a personal guarantee — from a company director. This lowers the risk for banks and normally allows you as a business to secure more funding — than would otherwise be possible.
Entrepreneurs can access startup loans as a form of unsecured financing — usually with personal guarantees in place.
How do unsecured business loans work?
Your business will first need to submit an application to a lender. This application would include information on your businesses history and finances. The lender will then process your application to check the financial stability of your business and the risks of lending you the money.
Should your loan application be approved, you will receive the money in a dedicated business bank account. You will then begin to payback the borrowed funds, with interest, over an agreed period of time.
Benefits of an unsecured loan
- Quick process — no asset valuations necessary
- No collateral or security needed
- Less paperwork involved
- Great as working capital
Limitations of an unsecured loan
- More expensive (higher interest rates) due to increased lender risk
- Loan terms are usually much shorter
- Companies credit history is a major factor
- May require a personal guarantee from a director
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