Unsecured Business Finance: Unsecured business finance is one of the sources that a business can access funds for operations, or use in other activities that will help it to grow. However, the global economic crisis has made it very difficult to access business financing. A business can access funds through many avenues, among them being personal savings, loans, and venture capital among others.
Unsecured Business Finance: #2 Categories !
There are 2 categories of business loans, namely secured and unsecured. The unsecured loans refer to the type of loans that the business is not required to pledge any collateral, in order to be advanced the loan. By doing this, the bank or lending institution covers the entire risk. For this reason, these loans tend to attract relatively higher interest rates than when the loan is secured.
The idea that no collateral is required makes this type of financing very attractive to many small business owners. Such people are of the view that, they will not lose their property, just in case they are unable to pay back the loans. Moreover, some of the lenders that normally give out these types of loans usually ignore the lack of credit history, as well as bad credit ratings, when approving their loans.
To some extent, this type of loan is very useful since it makes funds accessible, especially to the small business owners, who are normally neglected by major financial institutions. Most small businesses do not have sufficient collateral, and their credit history is shaky. These two factors make it difficult for them to be approved for credit by banks.
- Unsecured Business Finance: The nature of unsecured Loans
Since the risks involved with these loans are high, the lenders charge a comparatively high interest rate. However, borrowers must ensure that they only accept loans with fixed interest rates, as opposed to variable rates. A fixed interest rate will ensure that all monthly payments remain constant over the term of the loan.
Even though these providers of unsecured business finance tend to throw all caution to the wind, by lending to the groups that are locked out by the banks and other financial institutions, there are various precautions that they must take to ensure the borrowers do not default on payments.
The most common measure is the limiting of loan amounts that can be extended to borrowers. This amount is normally set at 45 -50% of the borrowers’ monthly earnings. Some lenders will require one to have a decent FICO score, in order to qualify for credit. However, other lenders will still extend credit to people with a poor FICO score.
- Unsecured Business Finance: The Pros of Unsecured Loans!
Unsecured loans have several advantages, which make them more suitable than the secured band loans. Some of these benefits are as below.
Easy Processing: The procedures involved in getting an these loans are relatively easier, compared to the normal loan processing. This is because the process overlooks most of the requirements that are involved in a standard loan application process, such as credit history and verification, and the processing of collateral.
Quick Approval: In addition to simplifying the loan process, the lenders facilitate quick approval. This is due to the same reasons of overlooking the standard loan application procedures and you should consider this when it comes to unsecured business finance.
As such, these loans are accessible to small business, as well as other categories of people such as the unemployed, and students, who are normally locked out by banks, because they have a poor or no credit history and lack sufficient collateral.
Limited Paperwork: When a lender has to run a credit history check or verification, and later on process the validity and ownership of property that has been submitted as collateral for a loan, the amount of paperwork involved is quite huge.
For this reason, the lenders that give unsecured credit avoid the paperwork mess by eliminating the need for credit checks and collateral. All that is required from the borrower is valid identification papers, bank account details, and proof of income.
Fixed Interest rates: Owing to the high interest rates that are charged, in order to access unsecured credit, the lenders offer fixed interest rates. This ensures that the monthly repayments remain constant, throughout the loan period.
Unsecured Business Finance: The Cons!
Regardless of the many benefits that these loans have, unsecured credit has some disadvantages, as discussed below.
High interest rates: Even though these loans are easier to get approval for, than the standard loans, they are generally very expensive to service. The interest rates are normally very high, in order to cover for the additional risk that the lenders expose themselves to, by failing to demand for collateral.
Loan Limits: The risky nature of unsecured credit can only allow lenders to give out limited loan amounts. For this reason, these loans are only suitable for short-term finance needs.
Short Repayment Period: The repayment terms for unsecured loans are normally very short. This is because lenders understand the kind of risk that they expose themselves by giving out these loans, and thus would rather spread the risk for a short period, usually 3 to 6 months.
Stiff Penalties: Borrowers incur stiff penalties in the event that they skip on their monthly repayments, or they try to prepay the loan amount, sooner than was scheduled. This is because the lenders expect to make money from the interest payments, for the specified loan term.
It is therefore, important for borrowers to read the fine print, and understand the kind of fines and penalties that they would be liable to under the circumstances and you should consider this when it comes to unsecured business finance.
Unsecured Business Finance: Finding the Best Deal!
For you to find the best deal, you should follow the following tips: First, no matter how attractive the prospects of getting unsecured credit are, you must always look at the terms of offer.
Second, you should shop around for a lender that can offer you the lowest interest rates and a reasonable loan repayment period. Third, you should never accept terms that you feel are too harsh on you. You can either negotiate, or look for another lender.
Fourth, only accept a repayment plan that can realistically allow you to pay off your loan in time. This will help you to avoid paying late charges and penalties.
Finally, only borrow the amount of money that you need. This will ensure that you get the finances to sort out your immediate financial woes, but give you time to find other manageable avenues to raise funds that you can use in the long term and you should consider this when it comes to unsecured business finance.