Businesses with few assets which can be used as collateral, like small enterprises, family businesses or start-ups, may have difficulties finding business loans. Unsecured business loans are often the only option - although these types of companies are not the only businesses resorting to unsecured business loans. How do these business loans work? What are their advantages and disadvantages?
Understanding unsecured business loans
Unsecured business loans are business loans which do not require the posting of assets as a security. They work in a pretty straightforward way.
What are unsecured business loans?
Unsecured business loans do not use corporate assets as security or collateral. They are simply loans made with an APR relying on quarterly or monthly repayments, at variable or fixed interest rates. This kind of business loan therefore carries very little risk for the business… and a very high risk for the bank or financial institution.
How do they work?
How unsecured business loans work can be compared to how personal loans work, inasmuch as they are pretty straightforward. A capital payment is advanced to company, and the company repays this capital either immediately, or after a certain period of time, either on a monthly basis or on a quarterly basis. The interest rate can either be fixed or variable. A flat fee for arranging the loan may also be charged and incorporated in the instalments. This business finance product can either be provided by banks, or by specialist business lenders, or by the government, or by peer to peer lenders.
Advantages and disadvantages
These business loans have their advantages and disadvantages - although small businesses and large corporations will not necessarily have the same opinion about these pros and cons.
Advantages of unsecured business loans
The immense advantage of this kind of business loans, as far as the company is concerned, is that they are not-asset based. Therefore, no properties owned by the business, or by the business owner will be put at risk in case the loan fails to be repaid. Also, and for this very reason that they do not use business assets as collateral, unsecured business loans are often the only option for start-ups or small enterprises… which do not have many securities to offer as collateral.
Disadvantages include the facts that:
- these kinds of business loans carry much higher interest rates than other business finance products;
- they also require a very lengthy approval process - it may take months - and lots of paperwork.
If these disadvantages are too much to cope with for business owners, alternatives such as loans with a director’s guarantee, receivables finance, business credit cards, simple overdrafts or secured loans can be considered. So to answer the question in the title of this article, no, this kind of business loans are not necessarily the last resort!