What are Unsecured Loans?
Businesses that require capital often turn to loans, and even those who are starting a business can sometimes require funding that isn’t available through personal finances.
The most common type of loan is unsecured business loans, but what exactly are unsecured loans, how do you apply, and how likely are you to be approved for one?
In short, unsecured business loans are a type of credit agreement that does not require any collateral. The lender will send cash and will propose an agreement for you to pay them back with interest. The loan isn’t secured against anything, but a personal guarantee may be required, and interest rates are typically higher to account for the lack of security.
Flexibility vs cost
An advantage to unsecured business loans is that they are usually provided quicker than other types of loans and have the flexibility to be used for whatever business needs you to have. Whether you need to buy equipment, hire new staff, or pay off other business expenses, unsecured business loans are at your service.
Unsecured loans are generally used for any purpose and are a smart way to pay expenses off while raising capital for your business - without providing security in the form of a property, which is one of the biggest risks with secured loans.
Start-ups and unsecured loans
It can be difficult for start-ups to acquire unsecured business loans because they don’t typically have a lot of previous financial management information or credit history for lenders to assess, which can be seen as a risk for lenders.
However, this doesn’t mean it is impossible. As long as you have a decent credit history (even if it’s not much) and can negotiate an agreement with your lender within a specific period, obtaining a loan shouldn’t be too difficult.
The application process
When applying for an unsecured loan, applicants will need to have the previous six months’ bank statements, company accounts, and personal details as the business director at hand. Without these, it’s difficult to proceed with the application.
With unsecured business loans, you can generally end your agreement early without paying any further fees or penalties, as long as you make the relevant payments towards your loan to reduce monthly commitments.
The main thing banks or lenders will consider is your credit score, as this usually determines your ability to keep up with monthly repayments. However, as a business owner, you should always have the necessary documentation ready, and a clear business plan outlining the reason for the loan and a repayment plan.
As no collateral is required for unsecured business loans, this type of loan can be considered one of the safest and speediest options for gaining cash for your business because there won’t be any processing time for your application. However, due to this ‘no collateral agreement’, lenders aim to reduce their risk by requiring business assets or personal guarantees.
Furthermore, interest rates are becoming more competitive in the unsecured business space, so flexibility becomes a key factor when considering what option works best for your business.
Unsecured loans are a great, flexible way of securing finances that can help boost your business, you can speak to industry experts to help you understand if this is the best option for your business.