If you are a business owner seeking finance, perhaps to purchase higher levels of stock or to fund a vital expansion project, then you are likely to consider a range of options. When doing so, the fact that lenders look for some form of collateral before offering any business loans can be a major stumbling block.
Small businesses can often be operating on a month-by-month basis, especially if they are trying to establish themselves in their early years. A loan can be vital to succeed in this aim but seem almost impossible to obtain. This can lead owners to ponder a simple question…
Is an unsecured loan an effective solution to this difficult situation?
The simple answer is: ‘Yes’, perhaps with the added proviso: ‘It may be’. Such a loan can provide essential finance when an opportunity needs to be grasped, or a short-term difficulty overcome. Possible alternatives include offering the business owner’s personal property as collateral; it’s entirely understandable that few might want to risk losing their home even for their business.
Considering the advantages of obtaining an unsecured loan
The first is often speed. Funds may be needed as a matter of urgency; it’s possible in some cases to obtain an unsecured loan within a day or two, sometimes even more quickly than that. The process is usually much simpler than for a secured loan, say from a high street bank, with all the processes that need to be followed, documents prepared, and stringent requirements to be met.
A second benefit can be that higher levels of finance can be obtained. Secured loans are tied to the level of collateral available; this is called the loan-to-value ratio. It’s usually the case that less than 100% of the collateral value will actually be loaned.
There are usually fewer restrictions on the use of the funds; and if a business then defaults on an unsecured loan, the lender can’t simply take the property offered as collateral without going through due process in the courts.
What are the drawbacks of taking out unsecured loans?
So far, unsecured loans may seem attractive – and they can be. It’s important to realize, however, that interest rates will be higher than otherwise, and repayment periods are often shorter in duration and required more frequently. However, it’s also fair to say that lenders may be more flexible, perhaps allowing various levels of repayment to match the seasonal trends of a business.
While the business owner has not put up collateral he or she is still personally liable; such a guarantee would allow the lender to pursue redress through personal assets. A limited or unfavourable credit history may count against an unsecured loan being granted. Equally, other lenders may show a greater interest in current and potential revenue streams when deciding.
The answer is always professional advice
With all of the above factors to be taken into account, obtaining sound professional advice from experts before deciding on, or committing to, unsecured loans in facilitating commercial finance is always a recommended early step for any business.