A small business, when at its peak of development, is likely to require money from outside sources for continued growth. A person getting a loan can be faced with a stiff challenge or two if he/she does not have much to provide as collateral for the loan. Business loans these days can be unsecured, meaning it’s possible to get it for small businesses without putting any assets at risk. It is important to know the much-appreciated good things and bad things about choosing this option before finally making the decision.
Understanding Unsecured Business Loan
What really is unsecured loan? How is it secured or unsecured loan different? Let’s take a look.
What is Unsecured Business Loan?
An unsecured business loan is a monetary borrowing that does not involve the borrowing of any asset as a promise to repay on default. Instead, lenders would gauge a possible business financials and credit score. The money can be paid for various needs: hiring, marketing, purchase of stock or inventory, to name a few. Very notably, it requires no collateral.
How Unsecured Loans Differ from Secured Loans
Here is a comparison of the two categories of loans to illustrate their difference.
| Feature | Unsecured Loan | Secured Loan |
|---|---|---|
| Interest Rates | Higher | Lower |
| Loan Amounts | Smaller | Larger |
| Approval | Stricter | Easier (with collateral) |
| Risk for Lender | Higher | Lower |
| Risk for Borrower | Less asset risk, higher payments | Asset risk, lower payments |
Who Can Benefit From Unsecured Business Loans?
These types of loans are usually good for startups which may not have any asset. The loans are great for businesses that do not have much collateral as well. If your business requires urgent cash injection, then unsecured loans can be availed at the quickest pace. It can come in handy when timing matters.
Available Types of Unsecured Business Loans
There are several types of unsecured business loans, all with a unique twist.
Term Loans
Each term loan relates to a lump sum, which you repay over a fixed amount of time. This particular type of loan involves specific payment schedules and interest rates. The eligibility criteria would depend on business credit history and credit. Term loans can offer predictable repayment plans.
Business Lines of Credit
Business lines of credit are almost similar to credit cards. When you need cash, you just withdraw up to your limit of credit. Then you pay down the account and borrow from it again. It is good for very short terms. The business line of credit offers flexibility in managing your cash flow.
Invoice Financing
Invoice financing refers to taking cash against unpaid invoices. Under invoice financing, you immediately lend a percentage of the invoice amount from the lender. Therefore, as soon as your client pays, you have to return that portion directly to the lender. With this type of financing, funds stuck in unpaid invoices can be easily mobilized.
Merchant Cash Advances (MCAs)
In essence, cash advances for merchants provide the borrower with cash immediately. The repayment would be based on a percentage of the sales completed by the use of a credit card. MCAs can turn very expensive, making them best suited for businesses with very strong credit card sales.
Qualification For A Business Loan Without Collateral
Lenders will want to be fully aware that one can repay the borrowed amount back. Therefore, this check is mostly a very meticulous process.
Credit Score Requirements
Lenders will pay very much attention to the score on your credit file. The higher your credit score, the better interest rates are. If your credit seems poor, look into your options for businesses. It may take some effort to improve your score for the lender.
The Finance Part of the Business
Revenue from your business is what the lenders look at when they qualify you. They also check whether you are profitable and your cash flow. Very important financial statements will of course matter. You have to make successful records.
Time In Business
Newer businesses usually have a tougher time qualifying. If there is any preference, it leans toward businesses that are somehow established. As you go the years without company and business operation, your chances keep increasing.
Benefits and Risks of Unsecured Business Loans
These loans have advantages and disadvantages, which come under the general category of financial instruments. Knowing them will enable you to prudently decide.
Benefits of Unsecured Business Loans
- It gives quick access to money.
- It does not require collateral for securing loans.
- It gives you the liberty to use the money however you want.
Disadvantages of Unsecured Business Loans
- Unlike a secured loan, the higher risk involved usually results in a higher interest rate and shorter repayment terms.
- Many lenders will also require a personal guarantee before they lend money.
- All these will make unsecured loans riskier.
Advice for Getting Loan Approval and Managing Your Loan
Handle your loan properly.
Completing Your Application
Gather and prepare the necessary documents. Work on improving your credit score. Create a strong business plan. An application well done gives good chances with approval odds.
Comparing Loan Offers
Don’t grab the first. Check for those interest rates and fees. Check the terms of repayment. Look into the standing of the lender.
Manage Your Loan the Right Way
Pay on time. Keep track of your cash flow. Don’t borrow more than you can afford. The key is good management.
Conclusion
In fact, unsecured business loans can sometimes act as a lifesaver for growing businesses. It serves as a perfect option for someone without collateral. But, think carefully before making the decision. Investigate all your options roguishly.
