An unsecured business loan is a loan that is granted without requiring submission of any collateral against which the loan will be cleared. Small businesses also have access to unsecured loans and can use it for a startup, capital investment or increasing the asset base, purchase of raw material or to meet operational costs.
It is perhaps the most viable type of loan for new ventures which have yet to establish an asset base or have a suitable credit history. It also keeps the personal assets of the borrower protected since secured loans may require personal guarantees from him or expect to use his house or other assets as collateral. An unsecured loan is similar to a credit card which can be used to make purchases for business needs.
Unsecured small business loans are offered by banks and financial institutions provided the small business is able to meet their tough criteria for selection and approval. Some of the features they would like to see before sanctioning an unsecured loan include:
- A sound business plan that details the production process, the manpower hired and the time frame before it will yield profits. It is important that the entrepreneur makes a special effort to prepare the business plan.
- Own funds of the entrepreneur if invested in the small business, give a positive signal to the bank that it is a serious venture and that he is committed to making it work.
- A good business credit score, if established, makes the bank view the entrepreneur who will pay back the loan
- His own personal credit history gives insights into his past credit dealings and if he is capable of defaulting.
- The profit potential of the business also works in the borrower’s favor.
Some facts about unsecured small business loans
- Unsecured small business loans are available to anyone and everyone, both owners and non owners, and even people with bad credit history
- They are offered both for short term and long term.
- Unsecured loans offer lesser risk but equal responsibility towards repayment and interest
- The interest rate charged is higher because the lender bears greater risk without asking for collateral
- Interest rates charged could be fixed or variable. Most borrowers prefer fixed interest rates to avoid the risk of paying higher interest should the rates increase.
- Unsecured loans are smaller in amount which is generally a percentage of the borrower’s earnings.
- Unsecured loans are easier to approve and quicker to get.
- They are the best way to raise money to meet emergencies.
- Unsecured loans are also known as signature loans since they are sanctioned without any additional documentary proof.
- Unlike other loans, prepayment of an unsecured loan invites a penalty and may turn out to be even more expensive
Unsecured loans are ideally suited for small businesses since they are easier to process, quicker to receive even though they prove to be more expensive. But they have to be paid back by the borrower, to maintain a clean credit record.