Benefits of an Unsecured Business Loan for Small Businesses
Requiring loans to meet their financing needs is common for all businesses, but even more so for smaller ones. Whether the industry needs to fill a cash flow gap, expand or invest in a new marketing campaign, there can be many reasons for a small business to seek external financing.
When seeking finance for the business, you will come across many different kinds of options, including secured and unsecured business loans. A secured loan requires the industry to provide an asset as security against the debt.
This could be a personal asset of the small business owner or an asset owned by the business. The business loses to refund the loan, and the lender has the right to seize the asset and sell it to recover its money. For small businesses that have a limited number of business assets and do not wish to put the owner’s assets at stake, it can be tricky providing collateral on a secured loan.
For this reason, unsecured business loans are a preferable option for small businesses as they allow you to borrow money from a bank/financial institution without having to put up collateral. However, you will still have to meet other eligibility criteria such as maintain a sound credit score, be in business for a specified time, and attain a certain level of turnover. In most cases, the business owner also has to provide a personal guarantee stating that he/she will repay the loan if the business fails to do so. Moreover, as there is no security for the lender, these loans tend to carry higher interest rates than secured loans.
Small businesses use unsecured business loans for several purposes, such as:
- Managing the cash flow of the small business.
- You are making business-related purchases like equipment and furniture.
- You are utilizing opportunities for growth and expansion.
- We are integrating new technology within the existing business framework.
Unsecured business loans offer several benefits for small businesses in need of external financing. Below six are one of the most prominent examples:
1. No Need for a Collateral
As mentioned above, there is no need to put up collateral with the lender when you apply for an unsecured business loan. For small businesses, this is very advantageous because they often do not have valuable assets to begin with.
Even if they do have any valuable assets, they are in the form of machines, equipment, and or leasehold property used for production. If these assets are used as collateral and later taken away by the lender in case of failure to repay the loan, business operations could come to a complete halt.
An unsecured loan does not put your assets at risk. You are free to use your assets in any way you want. You can sell your assets and replace them with the latest technology. This is not possible when your assets are used as collateral on loan.
2. Faster Approval
Banks, financial institutions, and other leaders have a lengthy approval process when it comes to secured loans. As per their SOPs, when the borrower provides collateral against their investment, the bank is required to assess it in detail before deciding to approve the loan. The asset’s current condition must be analyzed and a professional valuation obtained for it.
This process takes time as the bank needs to engage an expert on asset valuations, schedule visits, and obtain reports from him. For this reason, the actual loan disbursement process can take several days or even weeks to complete.
When there is no collateral involved, this time is saved, and the loan approval process is completed much faster. This may be crucial for a small business that needs quick cash to take advantage of a business opportunity. The short processing time is a great benefit that allows small businesses to have access to the required money when it is urgently required.
3. Less paperwork and Quick Disbursement
Processing unsecured loans do not require a lot of paperwork. Many of the alternate lenders accept online applications, which are then processed within a short time, and the loan disbursed immediately. Required documents like copies of bank statements and annual accounts can also be submitted online through the portal set up by the lender.
4. Shorter Repayment Period
Unlike their secured counterparts, unsecured loans tend to have a shorter repayment period. This allows the small business to pay off the liability quicker. There are two benefits to this:
- The balance sheet of the small business is cleared of the responsibility, improving its financial position.
- The business does not have to make high-interest payments over a longer repayment term.
5. Improved Credit Rating
A credit report is one of the essential tools for analyzing the actual financial worth of any business.
An unsecured business loan can also serve as a way of improving your credit score so that you can utilize it in the future to obtain further financing when required. Unsecured loans are short term in nature. They can be repaid within a short time without putting a strain on the cash flow of the company.
When you pay-off these loans within the stipulated time, your credit rating is improved. Applying for further loans becomes easy when banks/lending institutions see that you can pay back loans on time. It will also be a plus point when you are dealing with equity investors who are looking to invest their money in financially secure entities.
6. Freedom to Use the Money for Any Business Purpose
With some business loans, it is required that the business provide a reason for which the loan is to be used. The borrower is then bound to use the credit for that specific purpose only. The amount secured through the financing option cannot be used for any other purpose.
Such is not the case with an unsecured loan. It is a short term loan that may be used for any business activity deemed necessary by the owner. The borrower has the flexibility of using the cash obtained through unsecured financing without any restrictions or conditions attached.
7. The Final Word
Unsecured business loans provide a useful way of getting financing without having to put up your assets as collateral. The loan can be repaid in easy installments over a short repayment period at fixed interest rates. If your business is eligible for an unsecured business loan, it can be a great way to meet short-term funding requirements such as the need to strengthen your cash flows or make use of business opportunities.
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