Starting a business is never easy, and it will probably be the most difficult journey you will have to encounter because of the challenges it presents along the way. People only see the glamor of being called ‘an entrepreneur’ and being your own boss, but they rarely notice the long working hours and sleepless nights.
While it is a bumpy road most of the time, the most complicated aspect usually pertain to being able to secure money when you need it the most, which happens more often than entrepreneurs would like to admit. This is when taking loans become the only option, as troublesome as it may be. Chances are, you’re going to choose an unsecured business loan, but you first need to understand the pros and cons of that choice.
The many advantages of an unsecured business loan is the fact that no collateral is required, unlike a secured loan where you have to provide one like a car, property, or anything the bank could seize if you fail to make your payments.
This is definitely a better option for a business, especially if the company doesn’t even have any assets that could be presented as collateral, which means the founders would probably have to use their own, and that is never a good idea.
This is also one of the most important perks of taking out an unsecured business loan –– the process takes a much shorter time as compared to the secured option. Generally speaking, loan applications can be brutal because the lenders want to be as sure as possible that you can meet your financial obligations.
This is the case for any loan, but when a collateral is involved, the process takes much longer because the banks will have to examine the collateral closely to determine its value. That prolongs the process and adds more paperwork.
Amount of loan isn’t restricted by the collateral
When a collateral is involved, the bank wouldn’t just give your business any loan amount; it has to be tied to the value of the collateral. It is usually around 70% of the value of the asset you’re offering, which might be less than what your business needs. With unsecured loans, that is not the case. The amount of loan depends on other factors like your business’s cash flow and how good your credit score is.
As explained on https://www.ebroker.com.au/, you will naturally need to compare the different business loan options around you, because they will vary. Lenders don’t exactly offer the same amounts as one another, and you should shop around until you find the best option for you.
Higher interest rates
This is probably the biggest disadvantage of unsecured business loans. Lenders determine the interest rate based on the risk factors associated with the debtor. With secured loans, there is less of a risk because a collateral is involved, and if anything happens, that collateral can be seized.
Unsecured loans, on the other hand, don’t entail collaterals, which means there is a higher risk, and therefore the interest rates will be higher. So, it’s definitely something you have to consider before getting an unsecured loan, because the interest rates might be too much for your business to handle.
Tighter payment schedules
For the same risk factors mentioned earlier, lenders just feel more comfortable if the unsecured loan timeframe is shorter. With secured loans, the duration in which you can pay back the loans is longer because it’s not as risky.
But if there is no collateral, the lender wants their money back as soon as possible. And it’s also definitely much harder to get an extension in that case for the same reasons.
Harder to obtain
If you don’t have a collateral to bring to the table, getting an unsecured business loan is a bit more complicated. Banks, or any lenders for that matter, will take a close look into your business finances, cash flow, financial statements, credit score, and several other aspects –– to ensure that the risk is minimal.
This naturally makes obtaining a loan more difficult for a business with low credit score will most likely not qualify. In that case, you will be forced to look at other lending options, which might entail higher interest rates than your average bank.
Are unsecured business loans a good idea? In most cases, yes, they definitely are. They do come with their complications, as with any case of borrowing money really. At the end of the day, it is up to you to decide whether or not this is the best option for your business, and if you can afford the higher interest rates and deal with shorter tenures.