With interest rates remaining low, there has never been a better time to take out a loan. Entrepreneurs and business owners can get the cash injection they need to either get their new business off the ground or take it to the next level of development, with highly affordable repayment terms.
The stumbling block that many find, however, is that lenders often require some form of security to guarantee the loan. For businesses with high-value assets, that is not a problem, but today’s business environment is dominated by SMEs in the knowledge economy. Examples include consultancy firms, web developers and advertising agencies. For these, their tangible assets are often negligible in value, and they simply don’t have the security to offer up.
An unsecured loan is exactly what it sounds like – a loan that is made without the need for a business to put down property as security. Ordinarily a personal guarantee will be required instead. Given the evolving state of the economy, this type of loan is becoming increasingly important, and there are more categories of lender than ever who are offering finance in this way.
What are the advantages?
By its very nature, an unsecured loan is less complex than a secured one, as there are fewer “moving parts” – there is no need to assess the value of the property or engage solicitors, and the loan is made purely on the basis of the borrower’s creditworthiness, business model and financial performance.
This makes the whole approval process quicker and easier. In many cases, an unsecured loan application will be assessed, approved and processed in a matter of days. It is a quick, effective and painless way of raising capital to drive a business forward.
There is also less risk to the borrower, as tangible assets are not being put on the line. With an unsecured loan, the lender therefore takes more risk.
What about disadvantages?
It all comes down to risk and return. When the lender is carrying more risk, they will expect a higher yield, and so the interest rates on unsecured loans are higher than those on secured loans.
However, this is a “buyer’s market” – there are more lenders offering this kind of finance than ever before, and this means borrowers have the opportunity to shop around for the best deal.
Qualifying for an unsecured loan
This type of loan is based on trust and confidence in the borrower’s business. Those with a solid credit score and an impressive track record will find it easiest to gain access to the best choice of unsecured loan options. Profitable businesses trading more than 2 years whose owners have personal assets will typically find it easiest to qualify for an unsecured loan.
Even if this isn’t the case there are still lenders that may be able to help.
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