Many businesses find unsecured bank loans a great way to access capital. But do they take the time to assess the downsides of these loans?
Third-party financing is typical for businesses that want to expand their operations. Based on their short and long-term goals, companies may choose secured or unsecured loans.
Should you choose to take out an unsecured bank loan, advantages and disadvantages are something you need to understand from the jump.
Sure, it’s great that you don’t need collateral to get an unsecured loan. And there are even unsecured bank loans for poor credit borrowers.
However, there are some downsides to taking an unsecured loan. These may affect the type of unsecured loan you choose and the amount.
Explore both the advantages and disadvantages so you can make a more informed decision.
#1 – Low Risk
As said, you don’t need collateral to qualify for an unsecured loan. This means that the lender can’t access your other business assets in the event of a default.
That being said, some lenders may require you to provide a personal guarantee for the loan. So your personal assets could be at risk if that’s the case.
However, this isn’t a general rule. You can shop around and find a lender that can offer the terms and conditions that work best for you.
#2 – Available to Anybody
Assuming you’ve been in business for at least six months and don’t have outstanding debt, an unsecured loan is available to you.
Some lenders are a bit stricter in their vetting process. But since this is a short-term loan for a lower amount, most businesses qualify.
Additionally, these loans are available to the general public. Often, they’re used by homeowners, for example, to upgrade their properties.
#3 – Quick Approval Process
Since there’s no collateral to evaluate, your loan can be approved in a matter of days. Better yet, you can get unsecured bank loans online and get the money on your account without visiting the bank.
And the fact that the loan amount is relatively low contributes to the speedy approval. Depending on the lender and the amount needed, it’s not uncommon to receive the funds on the day of the approval.
#4 – Different Types to Choose From
Based on your current finance and business needs, there are a few available unsecured loan types:
- Business Cash Advance – past payment processing and debt records are used to process this loan, which usually requires weekly repayments.
- Debt Crowdfunding – you need a personal guarantee for this, where the funds come from contributions of multiple lenders.
- Unsecured Business Loan – this is the most common collateral-free unsecured loan. Your eligibility is based on business creditworthiness and credit history.
- Donation Crowdfunding – lenders provide funds to a business only if they believe in the potential.
- Equity Crowdfunding – multiple lenders get equity in your business in return for the loan, which still has to be paid off.
#5 – Multi-Purpose
With unsecured loans, lenders do not place limitations on the purpose.
Generally, it’s best to use these loans to grow your business or improve customer experience. Also, some companies use it to supplement their cash flow or finance expenses.
If you choose the second option, think carefully about whether it’s an ideal option to finance your operations. Often, unsecured loans are best for bridging a financial gap on a large project without draining your current cash flow.
#1 – Limited Amount
As previously discussed, the amounts available for a company’s unsecured bank loans are low.
Often, you may run into caps of around $25,000. Of course, there are lenders (usually non-banks) that may offer more. However, you’ll want to carefully assess the interest rate and terms and conditions to avoid overpaying.
#2 – Interest Rates
Compared to long-term secured loans, the interest rates are much higher with unsecured loans. This is because there’s no collateral and the loan is backed by trust alone.
Consequently, lenders see that as riskier and increase the rates. But that’s not always the case, either, and you might be able to get a more favourable rate.
If you have good credit history, particularly with unsecured loans, a bank may offer you a reasonable rate.
As you know, not all lenders extend the same interest rate. So check out a few offers and choose one that won’t put a strain on your cash flow.
#3 – Flexibility
Unsecured loans are inflexible in that you agree to repay a specific amount in instalments over an agreed period of time.
For example, you could be paying $500 every month for three years. During that period, you won’t be able to negotiate lower payments.
More importantly, early repayment may come with a fee.
Just remember to read the terms and conditions of your loan contract carefully and determine if that works with your cash flow and current finance.
If you’re taking out an unsecured loan to grow your business, the increased revenue may be enough to cover the repayment with some left over.
Unsecured Bank Loan – Advantages and Disadvantages Revealed
Unsecured loans can be a great way to quickly access funds to keep your business growing. However, this doesn’t mean you should take out this loan without due considerations.
The key disadvantages to keep in mind are higher interest rates and inflexibility, which do not necessarily make an unsecured loan a poor choice.
It requires no collateral and you can use the funds to finance anything you deem fit for your business.
If you’re still not sure if an unsecured option is the best, Unsecured Finance Australia is here to help.
We specialise in the best unsecured loans for small businesses.
Apply online and you can receive your approval within 24 hours.