Should You Apply for an Unsecured Business Loan?
Due to their growing working capital needs, many small business owners decide to pursue a secured loan. However, this type of small business loan requires collateral, which many business owners either don’t have or aren’t willing to risk.
Fortunately, there are other working capital options that don’t require collateral called unsecured business loans. In terms of structure, these business loans are like traditional, secured term loans except that, as the borrower, you’re not required to put up collateral to secure the loan.
If you don’t have collateral to secure a loan, an unsecured business loan may sound like a no-brainer, but it’s far from it. There’s much more to consider besides the question of collateral. Therefore, before you borrow money from a unsecured loan lender, you should weight your options.
In this blog post, we’ll review the questions you should be able to answer and factors to consider so you can decide whether an unsecured business loan is right for you.
Do You Want an Unsecured Business Loan? Answer These Questions:
1. Can I Avoid Submitting Collateral?
Even if you have enough collateral to put up in order to secure a traditional loan, you may not want to. That’s because, by using your assets as collateral, you risk losing those assets if you’re unable to repay your loan. Here are some common examples of valuable collateral that business owners don’t want to risk losing:
- Real estate
Depending on how critical those assets are to your business, the risk of losing them may be too great to bear. However, only you as the business owner can truly evaluate whether the risk of losing an asset is worth the money you receive from the secured loan.
In addition, some business lenders have set collateral requirements in place. Due to these requirements, they won’t provide unsecured loans to new business owners or individuals with bad credit scores. Therefore, if you’re a new business owner or don’t have strong business credit history, you may need to opt for secured financing.
If you decide that you don’t want to risk losing a business asset, are a long-time business owner, and have strong credit, unsecured business financing may be a good choice for your business.
2. How Do I Want to Use the Funds for My Business?
When pursuing business financing, deciding exactly what you need the funds for can help you decide on the right product for you.
Here’s why: when you receive a loan, you make small payments upfront through interest rates and fees for immediate access to a large lump sum of money. Ideally, you’ll make up for the cost of the loan by investing the funds you gain access to.
Therefore, you’ll likely want to take out a business loan to avoid a costly crisis or to take advantage of a growth opportunity. So, if you think there’s a chance that the loan’s cost will be less than the return you earn on the proceeds, an unsecured business loan could be the right option for you.
3. Am I Willing to Sign a Personal Guarantee?
As mentioned earlier in this post, with an unsecured loan, you don’t have to put up collateral. However, you’ll likely have to sign a personal guarantee. This is important to consider because a personal guarantee gives your lender the legal right to pursue your personal assets if you don’t repay your loan amount. In addition, this could affect your personal credit score.
In other words, the lender can come after your car, home, and other assets because signing the personal guarantee makes you personally liable for the debt. Again, like the first question, this is an issue of your own personal risk tolerance.
Some business owners want to avoid signing a personal guarantee at all costs, while others don’t mind. If you’re ready to sign a personal guarantee, then an unsecured business loan may be an attractive option.
4. Can I Afford to Make the Payments On-Time?
Like unsecured personal loans, unsecured business loans often have shorter repayment periods. As a result, the loan payments are usually more frequent or larger than the payments on a secured loan (which would probably be monthly payments). Of course, this will vary considerably depending on the online lender’s requirements, the size of the loan, and the loan term.
Also, because these loans aren’t secured by collateral, they’re generally more costly than secured loans, if all else is equal. In short, you need to consider the cost of any loan and how you’ll pay for it before you can decide if it’ll help your business.
Conclusion: Consider Unsecured Loans When Researching Business Financing
Ultimately, if you want to avoid putting up collateral, you’re prepared to sign a personal guarantee, and you can afford it, you should pursue an unsecured loan. To know for sure, though, you ultimately need to decide if the risk is worth the reward. Essentially, you must ask yourself if the investments you plan on making going to earn or save you more money than the loan will cost?
If you think they are, then you should consider submitting a loan application for an unsecured business loan!
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Editor’s Note: This post was updated for accuracy and comprehensiveness in May 2021.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.