Unsecured business loans can seem like a low-risk funding option for owners. You don’t need to put up collateral as a form of security which can make this choice more accessible for a wider range of people. If you don’t own any assets, then unsecured business loans can be a practical funding option. They are also suitable for business owners that would prefer not to provide security for the loan, especially if you want to expand your venture quickly. In this article, we walk you through exactly what unsecured business loans are, the pros and cons, along with how they compare to secured options.
What Is an Unsecured Business Loan?
Unsecured business loans are a type of lending that does not require security. Lenders often require their customers to provide some form of security that acts as a guarantee that they’ll repay the money that they have borrowed. If you’re unable to repay for any reason, then the lender can sell the security assets to make back the loan amount. However, unsecured loans do not have this asset requirement (although they obviously still need to be repaid).
Why Do Businesses Choose Unsecured Loans?
Unsecured business loans are becoming increasingly popular as the nature of company assets changes. In the past, a bricks and mortar business almost always had physical assets that it could use as security. It would have business premises, equipment, or stock that financial institutions would use a collateral. However, modern businesses don’t all fit into this traditional mold.
More and more businesses are being built around intangible things that can’t provide the security most loans require. If you run a software company or marketing consultancy, then it’s unlikely that you have a large amount of stock or equipment to act as security. You might have a rented office, some furniture, and computer gear, but it probably won’t be enough to secure a loan. In the modern world of shoe-string start-ups and ramen profitability, tying up cash in assets simply isn’t practical.
For businesses like these, unsecured loans can provide essential funding when they need it most. They can be used to invest in new premises, expand into multiple locations, or buy out a competitor. Unsecured business loans can pay for equipment repairs, new stock, or the salaries of your staff during a quiet seasonal period.
Secured vs Unsecured Business Loans
If unsecured business loans offer so many benefits, then you might be asking yourself why companies go for secured ones at all. The fact is that there are pros and cons to each type of loan, so it’s important to weigh up all the factors when deciding which is best for your business.
Let’s start by looking at the advantages of an unsecured business loan. As we’ve touched on briefly, there is no security involved. This means that if you fail to repay the loan then the lender can’t seize your assets. No-one takes out a loan expecting that they won’t be able to pay it off but sometimes the unexpected happens. Some people find that they sleep better at night knowing their personal assets are safe no matter what occurs in the future.
Not needing assets also makes unsecured business loans a lot more accessible. They are usually quicker and easier to get than their secured counterparts too. This is because there are no assets to value, which reduces the amount of red tape and paperwork involved. Approaching an alternative lender like United Business Funding can make the process even faster than a traditional institution – sometimes you’ll have an answer in just 24 hours.
There is always a flipside to any option and for unsecured business loans, it is often the cost. To offset the increased risk that the lender is exposed to, they usually charge more in terms of setup fees and interest rates. This can make the overall cost of funding substantially higher than the loan itself and may not stack up depending on your situation.
A lack of security also means that lenders require a perfect credit history and several years in business before they will consider a company. This makes them harder to qualify for, especially if you have not been trading very long. They may also ask you for personal guarantees which allow the lender to go after the assets of the small business owner (such as their house or car) and negate the ‘unsecured’ benefit.
Unsecured business loans are a good option for small loans amounts but don’t often offer larger ones. Because they are perceived as a higher risk for the lender, most won’t offer more than $40,000. If you need a larger amount then a secured loan may be more appropriate, or a commercial mortgage if you are looking to buy premises.
On the other hand, secured business loans may be easier to get for people with lower credit scores. If you have a poor credit history or have only been trading for a short amount of time, then providing security reassures the lender that they won’t lose their money. They can be a better long-term option since repayment terms are over an extended period, which may make monthly payments lower too.
The big disadvantage of an unsecured loan is that your assets are at risk if you fail to make repayments. If your business goes through a tough time then you could end up losing the equipment and premises that allow it to operate, causing you to fold altogether. If the loan is secured against personal assets, then you might lose your car or your home.
The application process can also take longer and be more complex, so you may not get access to the cash you need in time. Lenders require assets to be valued and there are legal implications involved. An online lender may be quicker since they often have automated processes that have been streamlined for efficiency.
How We Can Help
United Business Funding offers accessible funding options that support small businesses across the country. We can give you the capital you need, for today and tomorrow. While credit is a small factor, we approve your funding based on the current cash flow of your business – not years of financial history. Once funded, payback is made through a small, fixed daily or weekly payment from your business bank account. It’s that easy!
Our tailor-made packages are the ideal solution for established businesses or relatively new ventures. Unlike other lenders who require three years of trading history, we require your business to have been operating for a minimum of three months. We’ll take care of all aspects of finance, so you can focus on making your business a success. We can also help you with other areas of funding such as arranging lines of credit or equipment financing.
Get access to the working capital you need, even if you are dealing with less-than-perfect credit or have already been denied a bank loan. Whether you’re looking for a one-time cash infusion or have an ongoing need, your business opportunities can become a reality with United Business Funding.
Our hassle-free application process is fast and simple, with unrivaled support the whole way. CLICK HERE to learn more about our merchant cash advances or call us FREE on 888-351-3863 to speak with one of our funding advisors today.