In order to approve a business loan, there are certain requirements that must be met. Most banks and financial institutions providing this type of finance require some type of security in the form of assets, future income or the business itself. Unsecured business loans do not require any security and therefore have fewer requirements that must be met.
This is a major advantage for new businesses or startups that do not have any collateral to offer as security. Small businesses, home run enterprises and businesses that do not require assets to operate can also benefit.
There are however a few disadvantages to opting for unsecured finance. A major pitfall is that the interest is often much higher than applying for a regular business loan. This is purely due to the fact that the loan provider carries a greater risk at not being able to recover their funds in the event that the business goes under or the terms and conditions of the loan are not met.
Unsecured business loans are often in smaller amounts than regular business finance solutions. The term or period over which the loan will need to be repaid may also be significantly shorter than other types of business loan options. This means that they are not ideal for most types of businesses or finance requirements. Once again, this is due to the greater risk factor.
There may also be additional fees and charges for an unsecured business loan such as an admin fee or monthly service fees that must be covered before the loan amount will be approved and the repayments will go towards covering these costs before making a dent in the principal loan amount.
Some loan providers will require that the interest be repaid before the repayments will be deducted from the principal loan amount. This ensures that the bank or other type of loan provider recovers their costs quickly in the event that the financial obligations to repay the loan cannot be met for any reason whatsoever.
In some cases, a business loan provider may require a personal or alternative guarantee that the loan will be repaid. This may mean that the owner of the company, directors or even investors may become liable to repay the loan in a personal capacity should the business renege on the loan. A truly unsecured business loan should not have this contingency.
Crowd funding and lines of credit are also types of unsecured finance for a business. Crowd funding may however be considered to be more of an investment that provides an amount of capital in lieu of interest in the future profits of the business or shares in the business.
It is important to assess the pros and cons of all of these types of loans in comparison with regular business loans in order to establish if they will benefit the business in the long run. For most businesses, loans that require security or collateral are a better option than unsecured business loans due to the lower costs and that the loan amount will be recovered should the business not succeed.
Of course there are too many classic stories of mega-successful people and businesses who ‘broke all the rules' and went on to Win Big, so don't rule out the possibility of ‘just going for it' working for you as well. IF you are that type of person.