A complete guide to Unsecured Business Loans
If you are a small or medium enterprise looking to expand your business or some urgent working capital, an unsecured business loan could often be the answer. Below is a guide to understanding unsecured business loans, their advantages and how you could leverage them for your small business finance needs.
What is an unsecured business loan?
By definition, an unsecured business loan is one which does not require the borrower to pledge an asset or collateral against the debt.
Usually, when you avail a business loan from a bank or lender, they require some sort of asset or collateral to be pledged against the loan. These are called secured loans. A collateral is usually taken as an assurance by the bank or the lender to ensure that they can recover the money in case the business fails to repay the due loan amount. The value of the collateral or asset is often more than the amount that is offered as a business loan.
Loan amount and repayment period
On the other hand, an unsecured business loan is provided without any assets or collaterals, purely on the basis of performance of the business over a period of time. This requires the borrower to show a consistently good credit rating, an excellent financial track record and adequate cash flow forecast. Since the bank or lender takes a higher risk in providing these business loans, the interest rate associated with these loans are also often higher.
Unsecured small business loans are often offered for shorter periods ranging from 3 months to about 5 years and the loan amount varies from AUD $5000 to more than $500,000 depending upon the size of the business.
Each lender has a different policy associated with the loan amount and repayment terms. The rate of interest will also vary significantly based on factors such as length and health of the business, credit worthiness of the borrower and business etc.
Why should one go for an unsecured business loan?
Unlike secured loans, which require business owners to pledge their properties, inventory, equipment or other assets, unsecured loans do not require small business owners to risk their personal or business assets to obtain funds.
Time is a critical factor when it comes to business. As a small business owner, you are often required to take quick decisions that will impact growth. For eg., if the holiday season is around the corner and you need more staff or a new equipment to increase production, you cannot delay that purchase for want of funds. In such cases, unsecured loans are considered a better option, since the funds are usually available within a couple of days unlike traditional banks that would require more time and paperwork to process your loans.
What are the disadvantages of an unsecured business loan?
Since there is no collateral guarantee, unsecured loans attract a higher rate of interest compared to secured loans. This means that you will end up paying more interest over the tenure of the loan, making it more expensive than your traditional secured loan.
Unsecured business loans are also harder to qualify for, since these loans are purely based on the health of your business and your credit ratings. There is a higher chance of rejection if your business has a poor or non-existent credit history. If you are a fairly new start up, this might not be the best option for you.
Things to consider before applying for an unsecured loan
A strong action plan: The primary question one must ask is, why do I need this loan? List the outcomes you intend to achieve with the loan, be it for buying new equipment, hiring more staff, inventory or simply working capital. Once you have a good reason and an action plan, you will have better clarity on how to utilise the funds
Identify lenders who cater to businesses like yours: There are a lot of lenders in the market and each of them have specific criteria on who they can fund or not, how much they can fund, documentation required and interest rates. Since businesses are different, lenders also have preferences on the type of businesses they cater to. Hence it is important to identify the right lender for your business loan.
Repayment Plan: Since you are applying for an unsecured loan, the lender must be convinced that you have adequate continuous business to ensure repayment of the loan. So, build a robust repayment plan that showcases your monthly income, overheads and loan repayment to convince the lender that your business is in good health. Your credit score will also play an important part here. If you don’t have a healthy score, you might not qualify for a loan or end up paying higher interest rate.
Documentation: This is a critical (and often underestimated) part of the process that is vital to your loan’s approval. As mentioned above, every lender has a different criteria with respect to the loan they provide, and hence it is important that you are aware of and prepared to submit the necessary documents to ensure success of your application. This could include your business and personal tax returns, financial statements, bank statements and other legal documents related to your business.
If you are a small business owner seeking funds for your business growth, we at Capital Boost will work with you to understand your requirements, match you to the right lender and help you secure the right loan in the shortest time possible.
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