Many entrepreneurs find themselves in a tight spot financially from time to time when running their business and just need a small loan to tide them over. Sometimes they just need some extra cash to get inventory in stock or make a small renovation.
For these situations, an unsecured business loan might be a viable option.
Often, businesses will use collateral to get a better interest rate on a loan. In these cases, they must give up whatever they put up for collateral if they can’t repay the loan.
However, if they’re willing to pay higher interest rates, they might work also for unsecured business loans, which means less risk for their own assets.
Should I Get an Unsecured Loan for my Small Business?
There are a few things to consider when applying for an unsecured loan.
Shorter Application Time
Large-scale business loans with banks and other institutions can be a long, complicated process. Part of that is for a good reason: they are doing their due diligence to make sure you can pay back the loan.
When it comes to using collateral, the lender must carefully assess its value to determine if it is worth putting out a lower interest loan.
With an unsecured business loan, the process is much faster. They only need to check how the business is doing and its credit. For this reason, an unsecured loan is great in a tight pinch.
Many businesses simply don’t have the collateral necessary to get a good secured loan. This is especially true of startups.
Staking collateral from outside the business can also be risky. For example, some people may risk their house or similar, but that means that if your business goes under, you lose the house as well.
For these reasons, an unsecured business loan with no collateral can be a helpful option to have.
Higher Interest Rates
The primary reason not to go for an unsecured business loan is their higher interest rates. Since the lender doesn’t have a clear way to recoup losses if they aren’t paid back, they charge a higher premium.
Harder to Qualify
Without collateral, it may be faster to get approved, but it is also harder. Your lender is likely to take a close look at your business, including credit score, financial statements, business plans, and cash flow projections.
They are trying to minimize risk, so the more red flags they see, the less likely they will be willing to approve the loan.
Finally, unsecured loans are often smaller because the lender is unwilling to put that much risk into a business with no collateral to back it up. As a result, it’s difficult to find unsecured funding for larger-scale projects in a small business.
Unsecured business loans are a good option as a last resort for a business that needs a small amount of money to deal with a short-term problem or project. They are a great stop-gap measure because they can be obtained quickly and don’t risk further assets.