Many business owners secure a business loan to get them started, or to purchase equipment that will help their business grow sustainably.
There are plenty of reasons why people secure business loans. If you’re reading this, chances are you’ve decided a business loan could be right for you.
But what kind of business loan should you apply for? We’ve taken a moment to dig deeper into the world of unsecured business loans.
According to online finance dictionary, Investopedia, an unsecured business loan is:
“…issued and supported only by the borrower's creditworthiness, rather than by any type of collateral.”
What’s collateral?
When it comes to lending, the most common kind of collateral is property. But it can also be any asset provided by a borrower to secure a loan.
If the borrower fails to make a repayment according to the terms of a loan, the lender may seize or take the asset to recoup any losses incurred.
The claim a lender has to a borrower’s collateral is known as a lien. (Head here for the source on these definitions.)
But is an unsecured business loan the best idea?
An unsecured loan tends to suit business owners who do not have collateral to leverage. However, they do attract higher interest rates, as lenders perceive unsecured loans to be a greater risk.
If a borrower does default on an unsecured loan, the lender cannot seize property (or any other asset) to recoup their lost funds. This is why higher interest rates apply to loans that are unsecured.
This doesn’t mean unsecured business loans have no good use. Business owners who are experiencing cash flow issues may secure small amounts of funding to help keep the wheels of their business turning.
Rather than applying for a large amount of up to $500,000, business owners can consider securing smaller loans to cover things like purchasing stock, ordering, supplier debts or even paying wages.
These smaller unsecured loans are ideal when cash is expected, but hasn’t come in yet, as they can be promptly repaid when the funds do enter the business.
Many businesses find this to be a good way to deal with cash flow issues.
A good mortgage broker should tell you whether you’re a good candidate for an unsecured business loan. Among many other important questions, they should be able to determine:
Of course, your mortgage broker will consider many other factors when assessing which loan is most likely to serve your needs appropriately.
Ultimately, they should be transparent about whether you have the capacity to pay off an unsecured loan. If you don’t, a good mortgage broker should be able to provide reasons, and even possible alternatives, if they do exist.
Head here for a blog we wrote about the pros and cons of an unsecured business loan.
We have business finance professionals who help people in Australia secure business loans (both unsecured and secured).
We match you with a business loan that aligns with your objectives, budget and circumstances, so you have peace of mind that the loan you choose is right for you.
Many people try to secure a business loan through a bank or major lending institution, only to be turned down because the bank’s criteria does not match the borrower’s situation.
In some cases, a business loan can be secured, even after a bank or major lender has turned the applicant down. A Capita business broker compares loans from many different lenders, including smaller lenders with more niche terms.
So you get a tailored and researched loan recommendation. Contact us to get started.
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