Unsecured Business Loan Factors To Consider
Your business will likely require third-party financing at some time in the future to support its growth. One financial option you might want to consider is an unsecured business loan. There are a variety of unsecured business loan factors you should consider before reaching a decision.
An unsecured business loan is a third-party financing option for businesses where the loan is secured by the creditworthiness of the business owner, rather than any type of collateral. This is in contrast to a secured business loan, where the business pledges an asset as a collateral guarantee to the financial lender. Normally an unsecured business loan is more expensive, with shorter payment terms and loan amounts since there is more risk to the financial lender. However, there are a variety of reasons why a business owner may prefer this financing option.
Let’s review unsecured business loan factors to consider and see if it is right for your business situation:
Unsecured Business Loan Factors – Advantages
- Access To Additional Capital – According to the US Census Bureau and SBA, the majority of business owners use personal savings to fund their business expansion. Why? One factor is the difficulty of qualifying for a traditional bank secured business loan. Factors that prevent businesses from qualifying for a bank secured business loan include: lack of assets to pledge for security, unwillingness of the business to risk assets as collateral, complexity of loan documentation, insufficient business credit history, the business industry is not desireable by the lender, and others. In contrast, alternative financing lenders offer unsecured business loans to satisfy this market need by addressing many of this issues.
- No Collateral Required – While an alternative financial lender does not require the business to pledge a company asset as collateral, the lender will normally require a personal guarantee from the business owner as the responsible borrower. This is one means that the financial lender minimizes its risk on the loan. The implication as the business owner is that your personal assets (house, car, bank account) can be seized in the event of loan default.
- Simplified Loan Approval – An unsecured business loan approval process requires limited documentation and review by the financial lender. The review, approval and funds are normally available to the business within two weeks. Since no business asset is required for collateral, an external valuation of the physical asset is not required. However, since the business owner normally is required to pledge a personal guarantee, a high quality credit history is needed. The business owner’s credit information is available to the lender via the major credit bureaus in hours.
Unsecured Business Loan Factors – Disadvantages
- Higher Financing Costs –Since the financial lender has higher risk in the absence of a pledged collateral asset, interest rates are higher with an unsecured business loan. You will need to balance this higher financing cost versus the benefit of not risking a business asset.
- Shorter Financing Terms –Financial lenders will reduce the loan payment period as a means of reducing risk. This will also result in proportionally higher loan payment amounts versus a long-term traditional bank loan. Also, this higher paymment will adversely affect the business cash-flow. Again this needs to be balanced versus the benefit of loan asset risk to the borrower.
- Lower Financing Amount –Again, due to perceived higher risk, the financial lender will provide less capital with an unsecured business loan. You need to be certain that the capital amount you are requesting will achieve your business needs.
- Personal Guarantee Required – An unsecured business loan will normally require the business owner to provide a personal guarantee of payment. This implies personal risk of the owner’s assets and requires a good personal credit history. In the case of business default on the unsecured business loan, your personal assets will be at risk.
Unsecured Business Loan Factors – Conclusion
An unsecured business loan is a viable financing option when a business does not have assets to pledge as loan collateral or is unwilling to risk these assets. It is harder to get approval for an unsecured business loan, but the flexibility of not pledging company assets can offset its higher costs and shorter payment terms on the loan. Depending upon your current business situation, this financial solution may fit your business needs, now or in the future.
Please call us at (888) 213-3383 to help review which financial product best serves your business needs or Contact Us via Email.