For small business owners, finding the right working capital solution can be confusing. If you are a business owner facing a situation where an injection of cash can be the difference between success and failure, or grasping an opportunity or missing out, you may be interested in understanding what an unsecured business loan is and how it can help you.

This finance solution offers flexibility and advantages but still needs to be carefully considered.

Unsecured Business Loans Explained

An unsecured business loan is a financing option that doesn’t require you to put up any collateral.

By contrast, a secured business loan means you need to put up assets like equipment or property as security in the event that you can’t repay the loan.

With unsecured business loans, you do not need those assets and you do not risk losing them. Instead, financial lenders approve unsecured loans based on other factors. These can include your business’s creditworthiness, financial history, and future revenue/profit projections.

When to Consider an Unsecured Business Loan

Unsecured loans can be an excellent financial solution in a variety of scenarios.

1. Financing Short-Term Needs

As a business, if you are experiencing a gap in cash flow you may just need a quick injection of working capital to cover operational expenses. Alternatively, you may need to execute a timely marketing campaign to take advantage of a gap in the market. Either way, unsecured loans offer a faster application process compared to secured loans.

2. Building Business Credit

If you are a new business or a start-up, you may lack the collateral for secured loans and the credit history required for larger loans. Unsecured loans can help businesses establish a strong credit history, thus enabling larger loan applications in future.

3. Preserving Assets

As a business owner, there can be many reasons why you might not want to risk valuable assets. An unsecured loan allows you to access the funding you need to grow and succeed without having to put up any asset as collateral.

Eligibility Requirements for Unsecured Business Loan

While there is no single standard for eligibility requirements, there are some general indications that most financial lenders look for in an application.

It is important to bear in mind that since there’s no collateral involved, lenders have stricter eligibility requirements as their risk in extending the loan is higher.

  • Strong Credit History: Both your personal and business credit scores will be considered. This will give the lender an indication of how strong your ability is to repay the loan.
  • Profitability and Revenue: Lenders will assess your business’s financial statements (indicating past financial performance) and projections (predicting future financial performance) to ensure your ability to repay the loan.
  • Business Age: Established businesses generally have a higher chance of approval compared to startups thanks to the greater financial history they are likely to be able to prove. However, for new businesses, there are still avenues for accessing the funds you may need.

The Advantages and Disadvantages of Unsecured Business Loans

Advantages

Speed

The application process for unsecured business loans is faster than that of secured business loans.

Without the need to prove and value collateral, the application process is streamlined and thus significantly quicker.

Asset preservation

As outlined above, not having to put an asset up to serve as security means that in the event you do default on the loan there is no risk to your property.

Flexibility

Unsecured business loans can be used for various business purposes and, with a financial lender like ScotPac, can be customised to suit the needs and borrowing capacity of your business.

Disadvantages

Higher Interest Rates

Unsecured loans are riskier for the lender as there is no security to help recoup at least some of the amount lended.

To help reduce this risk, lenders will often expect higher interest rates for unsecured loans compared to secured ones.

Borrowing Capacity

As with interest rates, the borrowing capacity for unsecured loans is typically smaller than for secured loans.

With no collateral to reduce the risk, there may be less confidence in a financial institution to lend out higher amounts of money.

Stricter Eligibility

Along with the factors above, the other element that is impacted by the lack of security is the eligibility requirements. The asset provides reassurance that the lender will have limited financial loss in the case of a default on the loan.

When there is no reassurance, some lenders require stricter eligibility requirements.

Fast, flexible funding with ScotPac

At ScotPac, our specialists help clients understand what those requirements may be and how to go about securing the loan you need based on your eligibility.

Our  fund amounts from $10,000 to $500,000. And, once approved, you will be able to access the working capital within just 24 hours, flexible business loan options fund amounts from $10,000 to $500,000. And, once approved, you will be able to access the working capital within just 24 hours.

If you would like to explore what unsecured business loans can offer your business, why not reach out to one of our specialists today?