Unsecured business finance is a helpful tool for any small business owner. But before signing up for any such loan, find out its pros and cons here.
Many small business owners are opting to sign up for unsecured business finance to fund their additional financing needs.
But does it mean you definitely have to do it, too?
That’s hardly the case.
Like any kind of loan, unsecured bank loans carry risks that can prove fatal if one is not careful. You could find yourself in deep trouble. Or worse, you could even lose your business.
But at the same time, extra funds from unsecured bank loans could be the one thing that your business needs to take off.
In this article, we’re going to dive deep into what unsecured business loans are all about. This knowledge can help you decide if it’s actually right for you.
Explaining Unsecured Business Finance
An unsecured business loan is an alternative option for startup finance. What sets it apart from secured business loans is this:
It does not need collateral before lending money to entrepreneurs.
Usually, unsecured loans are used by entrepreneurs to do the following:
- Start a new business
- Expand an existing business
- Consolidate all debts
But most often, such loans require a person to have a reliable source of income and good credit.
If you want to find out if it’s a viable option for you and your business, here are some of the most common pros and cons for unsecured business loans:
Pros of Unsecured Business Loans
Pro #1 – Shorter Application Process
Banks and other lenders typically have a long list of requirements that need to be met before you could apply for a business loan.
Of course, they want to make sure that the applicant is a responsible and credible business owner who won’t run away with their money. So, they have a tedious application and selection process to find out who they should lend money to.
But what if you’re reeling from an unforeseeable emergency?
Or what if you want to take advantage of a sudden dip in the market that could potentially grow your business in a few months?
Then your best bet is to apply for unsecured business financing.
Unsecured business financing usually has a much more streamlined application process to help out businesses in need.
Pro #2 – Less Risky than Secured Loans
There is an inherent risk that comes with any kind of loan or funding method. But compared to a secured loan, an unsecured business loan is relatively less risky.
Because they don’t ask you for collateral. They won’t be looking for any valuable asset that they could seize in case you can’t pay your loan.
But since you won’t be required to present collateral, some banks ask for more requirements. This could include asking you to sign a personal guarantee before your funds could be released.
If you sign this guarantee, you are allowing the lender to pursue your personal assets if you refuse to pay your debt.
Pro #3 – Funds are More Accessible
There’s a big reason why a lot of startups or small businesses opt for unsecured business financing:
They have no collateral.
Owners of such businesses are just starting out their enterprise and they need funds to continue growing it. So, they typically do not have any car, property, or other assets to use for secured loans.
That’s why the ‘no collateral’ feature of unsecured loans is so appealing to budding businesses all over the world.
Cons of Unsecured Business Loans
Con #1 – Higher Interest Rates and Total Cost
You might be asking, “Why would any sane lender offer unsecured loans if it means foregoing the need for collateral?”
Well, the answer to that is simple:
Higher interest rates.
Because it’s a lot riskier for lenders to offer no-collateral loans, they can typically charge higher interest rates and extra costs.
If you don’t want to pay these higher rates, then I suggest looking at secured loans instead. Otherwise, then this shouldn’t be a big deal.
Con #2 – Total Interest Rate vs APR
For a typical secured loan, banks and lenders present the annual percentage rate (APR), which includes all fees.
However, for unsecured bank loans, that’s not the case.
Lenders of unsecured loans usually present the total interest rate based on simple interest, instead of the APR.
And here’s a pro tip: Don’t be deceived by the numbers.
The advertised total interest rate will always be lower than the equivalent APR. But as earlier explained, the interest rate for unsecured loans will always be higher than that of secured ones.
For example, an 8% simple interest rate for a 1-year loan is not the same as an 8% APR. Because the 8% total interest rate is actually equivalent to a 14.45% APR without other possible fees.
So, be very careful when checking out an unsecured loan. Read the fine print to determine what kind of interest rate will be applied to your loan amount. When in doubt, don’t hesitate to ask.
Con #3 – Shorter Repayment Schedules
Aside from increasing interest rates, lenders also offer unsecured loans at a shorter repayment period. That way, they can mitigate the risks involved in offering unsecured business financing.
Simply put, you have less time to pay for unsecured loans compared to ones with collateral.
This is a big consideration if you’re not really sure when you can return the money. Or if your business would profit in time after using the funds as additional capital.
Find the Best Unsecured Business Loans for You
The pros and cons of using unsecured business loans are all valid.
On one hand, you get to borrow money fast and with less risk through unsecured loans. But on the other hand, you’d also be slapped with higher fees and shorter payment periods.
As a small business owner, you are now faced with the hard decision of whether an unsecured business loan is worth your time.
If you’re thinking about getting an unsecured business loan, we at Unsecured Finance Australia are happy to help.
We offer the best unsecured business loans for your business.
Apply online and you can receive your approval within the next 24 hours.