What Are Unsecured Business Loans And How Do They Work?

Business owners will often reminisce about how difficult it was for them to provide the funding necessary to start their business. Funding is one of the most common challenges that aspiring entrepreneurs usually face early on.

However, acquiring capital nowadays is much easier than ever. With the abundance of lending entities flourishing online and offline, as well as government-issued grants, almost everyone has access to funding. One very popular method that business owners across the world resort to is unsecured business loans. 

Unlike regular-secured loans, unsecured loans do not require the borrower to pledge a collateral. This makes the risk of unpaying tolerable, especially for business owners who cannot afford to be put in situations of potentially losing any assets to repay their lenders. Let us dig deeper below to get a better understanding of what unsecured business loans are and how they work:

What are Unsecured Business Loans?

Unsecured business loans are quite lucrative for both the lender and the borrower. Lending parties get the chance to “invest” their capital and collect the cost of their lending by charging borrowers relatively high monthly interest payments compared to secured loans. 

Borrowers acquire the risk-free almost instant capital to invest in the business, which will help in generating profits and accordingly paying off the unsecured business loan. It is a hassle-free win-win situation for everyone.

In business, companies are all looking for opportunities that would benefit their operations and, ultimately, their bottom line. With unsecured business loans, they can achieve everything they want and more than they initially thought.

How to Acquire Unsecured Business Loans?

Given how attractive the “collateral-free” aspect of unsecured loans is, many new up and coming business owners are highly interested in them. With the vastly growing numbers of small businesses in strong economies like that of Australia, non-bank lenders are multiplying to cater for their funding needs.

Finance professionals at https://www.ebroker.com.au/ are using their expertise in this field to connect legitimate independent lenders with small business loan seekers, in order to bridge an otherwise growing gap. Without the help from these professionals, a small business may struggle to acquire the capital they desperately need for their company’s operations to continue seamlessly.

If you are looking into finding an unsecured loan to purchase new equipment for your personal business, be wary of sketchy websites and find a trustworthy agent to connect you with the right lender. Do some research about the available options before signing any documentation, and listen to the advice from others that went through a similar process.

What Affects Unsecured Loans Entitlement?

Just like any kind of loan, the lender needs to do some kind of assessment to decide whether a borrower is worth the lending risk or not. If your business is swamped with debt and your credit score is bad, you will find it hard to qualify for an unsecured business loan.

Since there is no collateral, lenders look at your books to decide whether to provide you with the loan. Bad history with repaying your debts to other lenders will act as a red flag and scare away your potential unsecured loan lender.

However, even in this tough situation, you can turn things around for your own good. You can consider finding a cosigner: someone with a better credit score who will be held responsible on your behalf in case of defaulting.

Another option is to lower the amount you are asking for to better match your current credit situation. Even when the company doesn’t get the total amount they were expecting, they can still prove to the lender that they can pay back the loan as agreed upon to raise their credit rating and win back some of the lender’s goodwill, which might lead to future loans.

What If You Are Unable to Repay the Unsecured Business Loan?

Now that you have acquired the unsecured loan and used the capital to reinvest in your business or to get you out of a cash flow crisis, what happens if you cannot afford to repay your unsecured loan?

In the absence of collateral, your lenders cannot put their hands on any assets to get their money back. Lenders in such cases will start with increasing your monthly interest payment in order to make up for your defaulting, which will further worsen your credit score.

This will negatively affect your chances of acquiring loans in the future, but that is not the only downside. If you continue to default, unsecured loan lenders will eventually go to court suing you or your company, forcing you to sell your assets in order to repay your debt. 

Before putting the company at more financial risk, business owners should consider all their options carefully and only borrow the amount they need for a project they are currently working on. Borrowing a higher sum will result in larger repayments, which businesses may struggle to make if they are not responsible for their spending.

Are Unsecured Business Loans Worth the Risk?

The short answer is yes. Just because it is more attainable and seemingly risk-free, does not negate the fact that it is still a loan after all. If you’re seeking a relatively fast and easy way of acquiring funds, an unsecured business loan is the answer.

Just bear in mind the higher interest rates you are going to incur and that you completely understand that your whole business will be at stake in case you default. You should clarify any confusion by requesting that the lender explain everything in detail so that there are no misunderstandings in the long run. Remember, the loan’s purpose is to assist the company, not to jeopardize it.

Considering the nature of your business and its level of maturity, you can make the right decision regarding whether or not to apply for an unsecured business loan. Financial experts will advise going for an unsecured loan when your business is established enough to survive the brutal price of unpaying an unsecured loan. You need to do your research and try to find an in-between deal that you can afford should things go south. 

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.