Should You Apply for an Unsecured Business Loan?
You could pursue a secured loan, but if you don’t have collateral, you won’t get very far. Fortunately, there are other financing options that don’t require collateral called unsecured business loans. In terms of structure, these loans are like traditional, secured loans except that, as the borrower, you’re not required to put up collateral to secure the loan.
If you don’t have collateral for 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.
In this post, we’ll review questions to ask yourself and factors to consider so you can decide whether an unsecured business loan is right for you.
How to Determine if an Unsecured Business Loan is Right for Your Company:
Do You Want to Avoid Putting Up Collateral?
Even if you have collateral to put up for 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.
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.
If you decide that you don’t want to risk losing an asset, an unsecured business loan may be a good choice for your business.
Decide Exactly How You’ll Use the Funds
If you’re unsure about the answer to the first question, deciding exactly what you need the funds for can help.
Here’s why: when you receive a loan, you make small payments upfront — through interest 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 usually want to take out a loan to avoid a costly crisis or to take advantage of an opportunity. Due to this, 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 right for you.
Ready to Sign a Personal Guarantee?
As mentioned earlier, with an unsecured loan, you don’t have to put up collateral. However, you will 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.
In other words, they 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.
Calculate How You’ll Make the Payments
According to the Huffington Post, unsecured business loans will often have shorter repayment periods. As a result, the payments are usually more frequent or larger than the payments on a secured loan. Of course, this will vary considerably depending on the lender’s requirements and the size of the loan itself.
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.
Ultimately, if you want to avoid putting up collateral, you’re okay with a personal guarantee, and you can afford it, you should pursue an unsecured loan. To know for sure, though, it all comes down to risk versus reward. That is, are 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 applying for an unsecured business loan.
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.