Unsecured business loans are loans that do not require collateral in the form of assets from the borrower to be set against the loan amount.
There are many types of businesses that can benefit from an unsecured business loan. New businesses or start-ups often seek additional cash to improve finances or short-term cashflow but may not have enough collateral, or assets, to be used for any other type of loan. Seasonal businesses will see highs and lows during the year based upon seasonal factors or fluctuating sales volumes. Additionally, many firms will wish to use the loan for further investment in the business.
Certain types of businesses, such as software authors or consultancies, base their work on an idea or concept, which can be harder to explain to a lender in order to justify the lending risk and in which there are few tangible assets. An unsecured loan may be an ideal solution in this context.
In some cases, the nature of the business itself is not the problem and a workable business plan that has been presented and outlined sufficiently will provide reassurance to a prospective lender. What is important is the loan amount that a company may request. For a very new business, the amount will almost invariably be constrained as many lenders prefer to see a company that has been operating for six months or more.
Clearly, since this is a type of loan that is not secured by collateral in the form of tangible assets, there is significant exposure for the ender in the event that the business defaults on payments. As such, your application will be subject to greater scrutiny. Lenders are likely to want to see details of a company’s finances, such as a balance sheet, turnover and a breakdown of assets and other liabilities. They will also want to see a business plan to explain what it is that the loan needs to cover or will be put towards.
Once again, since an unsecured loan does not require the business’ or personally owned assets to be set up as collateral against the loan, the borrower will generally need to demonstrate a very good credit rating. A positive rating helps the lender to measure the risk of lending to the particular business and assess just how sustainable and reliable the repayments are likely to be.
Clearly, as a borrower, there is a major advantage in retaining your assets unencumbered by use as collateral. The company retains full control of these assets and can do with them as it pleases. This leaves the potential to use these assets to secure further financing in the future, should the situation justify it although you should always borrow responsibly.
Since asset valuation and the associated administrative overhead is not required, the process tends to be faster and easier to complete. This is of particular value where time is of the essence, with the added advantage of reduced administrative costs from the lender.
Although unsecured loans will often attract a higher rate of interest which affects repayments, the repayment schedules tend to be over a shorter period so there is a further factor there in mitigating the overall cost.
Due to the nature of unsecured loans and the fact that there are no assets put down as collateral, the sums available are likely to be smaller than with secured types of loans and are generally speaking charged at a higher rate since the lender is taking a higher level of risk with this loan type. The credit score of the business and applicant will need to be favourable. Without a good credit history, and without assets being used as collateral, it will potentially be a harder to agree a loan or, if this is achieved, the associated interest rates may be considerably higher.
Performing an unsecured business loans comparison here at Bright Loans should bring up a number of options from a range of reputable lenders. Clearly, you should always undertake your own due diligence on a lender before committing to a loan product. Since unsecured loans through specialist commercial lenders are often agreed far more rapidly than through banks, for example, you may receive the funds relatively quickly to use for a time-limited investment opportunity, for example, or to cover critical operational costs encountered by so many start-ups at the outset.
As with any loan product, it is advisable never to borrow more than is necessary to avoid falling into the trap of using subsequent loans to repay earlier loans. At some point, lenders will be less willing to take the risk on a company that has already borrowed from a number of other lenders, suggesting a risk in meeting repayment schedules.
In some cases, a company that requires an unsecured loan may be in a somewhat precarious position to start with but this does not necessarily mean that a loan is not the right option. Unsecured loans have plenty of advantages and provided that the business requests only the amount it really needs and plans for a suitable repayment scheme, the loan may make the difference between long term viability or immediate closure.
Ultimately, lenders will only lend to those they feel happy to take a risk on. Firms who do not ask for more than they need may stand a better chance of qualifying. Lenders will always check the financial records of a business but specialist commercial lenders may exercise business judgement far and beyond that seen in so many of today’s high street institutions where ‘computer says no’ is all too often the result of impersonal automated risk scoring systems.
Lenders are in business to lend money; they are not going to turn down everyone and they cannot become overly restrictive in a competitive marketplace. If you have absolute belief in your business, a solid business plan, you have your financial records suitably organised and you are willing to be honest and transparent with a potential lender, you stand a fighting chance of securing appropriate finance.