Pros and cons of unsecured business loans: Are they right for you?

Nicki Ghazi

Thursday, 13 February 2020

Whether you’ve run into cash flow issues, or simply need a hand in keeping day-to-day operations running smoothly, an unsecured business loan could help you achieve your business goals.

They can be particularly suited to small businesses during their growth phase. Here’s why.

Benefits of an unsecured business loan

No need for collateral

Collateral is a form of security. When taking out a secured loan, lenders will require some form of security in order to justify the risk involved in lending to you. Collateral can take the form of any valuable asset that you own, including equipment, a company car, property, etc.

If you happen to default on your loan, your lender will use the collateral to make up for any losses incurred.

The issue is, not everyone has an asset readily available to offer as collateral. If you’re a start-up, or new to the market, chances are you’re still dreaming of a snazzy office space... You don't have one to offer up. The benefit of an unsecured business loan is that you don’t need to provide collateral.

Instead, your lender will look at things like:

  • Your credit score
  • Your credit history
  • Your bank statements and financials
  • How much money you’re looking to borrow

Be prepared to explain how you plan on successfully repaying the loan back on time.

No need to offer up any assets from the get-go

With an unsecured business loan, there’s no need to worry about sacrificing your property, or other assets, at the time of application.

However, it's important to note that most unsecured lenders will take personal guarantees from directors or shareholders within your business. This means that if you were to default on your loan, you (or the director/s of your business) would be personally liable.

Applications are quick and easy

Applying for any loan can be a long and daunting experience. Lenders need to be confident that you’ll be able to repay your loan back on time and in full.

But they don’t know you or your business (yet). Often, extensive vetting is required, and in the case of secured loans, your collateral will be evaluated in order to determine it’s true value.

With an unsecured loan, you’ll skip this long winded process. Our dedicated product specialists will get to know you and your business upon first contact, seamlessly collect your information and streamline the process. Expert industry knowledge in tailoring your solution will further enable a fast approval and settlement of the loan. You could even receive funds in as little as 24 hours! For this reason alone, many businesses opt for unsecured loans with Valiant.

Paying off an unsecured loan can build trust

Getting approved for finance is all about trust. The more you have to show (assuming your credit history is positive), the better.

Taking out an unsecured loan and successfully chipping away at it can help to build your trustworthiness in the eyes of lenders. It’s great for building a positive credit history and improving your credit score. You’ve also proven yourself responsible and stable enough to commit to your repayments, hence increasing your chances of being able to borrow more money in the future.

Disadvantages of unsecured loans

Higher interest rates

All great things come with a cost. Unsecured business loans may seem too good to be true on the surface, but they do come with higher interest rates. From a business point of view, lenders need to justify the risk involved in approving your application without collateral, which is why they’re more expensive to take out. The speed of the unsecured loan process also contributes to the lenders’ higher set up fees, however, Valiant will assess your situation at no cost!

The higher interest rates that typically come with unsecured loans is something to consider, but also keep in mind that not seeking finance can come at a cost too. And an expensive one, at that.

Product specialists at Valiant can help you find the best business loan for your needs, based on their trusted panel of 80+ lenders. If high interest rates are of concern, your product specialist can help you determine the return on investment you could expect from taking out an unsecured loan. You’ll also get a snapshot of quotes that can easily be compared side-by-side.

Smaller loan amounts and terms

Lenders normally aren’t willing to approve huge loans for businesses with no collateral. Doing so would drastically increase the level or risk they’d be dealing with. Often, this means you’ll have to make-do with a smaller loan term, which isn’t necessarily a bad thing, depending on how much cash you need.

Unsecured financing could be a great option for businesses that need smaller cash injections, but may not be the best option for those who are looking to make major investments like buying a new property or large piece of equipment.

Strict eligibility requirements

Without your personal assets at stake, there are tighter eligibility requirements you’ll need to fulfil during the loan application process.

Lenders need to make sure that an unsecured business loan is a good fit for you in order to minimise risk. You’ll need to have a clear credit history along with a regular revenue stream.

At the end of the day, being approved for finance comes down to how trustworthy you are with credit. If your lender is confident in your ability to make timely repayments, you’ll have a good chance of being approved!

Sign me up! Where can I get an unsecured business loan?

If you’re interested in business finance, Valiant is the place for you. We work with over 80 lenders, from big banks to small fintechs, to find a solution that will fulfil your business objectives. Enquire about unsecured business loans today to find out what you qualify for without impacting your credit score whatsoever.

Our product specialists will do all the heavy lifting for you, from application through to settlement.

Nicki is our Senior Working Capital Manager. She works with a team of talented product specialists, leveraging 25 years combined experience to help Aussie businesses find tailored finance solutions.

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