People sometimes run short of money or have big one-off expenses. When they do, they can usually turn to their credit card, an overdraft, or a personal loan. Businesses also have times when they don’t have the cash to pay for something they need. They too have a variety of options to borrow that money, and one of these options is the unsecured loan.
What Is an Unsecured Loan?
If your business needs money (for startup costs, expansion, or to cover a cash flow problem) you can ask a bank or other finance institution to lend you the money you need. Many small businesses fail, and the bank may worry that you will be unable to repay all that money. So they will want some guarantee that they will get their money back if the worst comes to the worst.
The usual way for the bank to do this is to get the loan linked to (secured by) some of your assets—property, vehicles, machinery, etc. If necessary they can seize those assets and sell them to recover their money.
An unsecured loan is one where the bank does not link the loan to any of your assets. In the event of a failure to repay, the bank would have to take its chances to recover its money.
Why choose an Unsecured Loan?
An unsecured loan is often the avenue of choice for a business.
- The assets of the business are not automatically at risk if you hit a problem.
- There is a variety of repayment options available.
- If you do not have significant assets, you might find it difficult to get a secured loan.
What are the disadvantages?
Of course, all good things have their downside.
- Unsecured loans are more risky for the bank, so the interest rates are higher.
- If your business is new, the bank is less likely to offer you an unsecured loan.
- The amounts on offer tend to be lower than those for secured loans.
How to get an unsecured Loan?
Unsecured loans come in a wide variety of packages. You need to research the market carefully before you apply for a loan. There are some unscrupulous lenders out there.
If you want the maximum flexibility you could look for a Line of Credit (LOC). This establishes a maximum amount which you can draw on as and when you need it. Business Line of Credit Hub can give you a good introduction to this type of loan.
Traditional loans will come with different interest rates and with a variety of conditions attached, which can sometimes be adaptable to your circumstances. You will need to study the conditions carefully to be sure you can meet them. Only apply for a loan when you are sure it will be granted.
Follow the money
Businesses need more than good ideas and hard work. They also require money. You can’t run your business successfully without finance. At some time your business will almost certainly need to borrow money, and knowing your options is a good way to start.