Pros and Cons of Unsecured Business Loans

Many Australian entrepreneurs find themselves in need of extra capital at some point along their journey. Unsecured business loans are an attractive option for cash-strapped companies, and offer pros and cons over traditional bank loans and other low interest borrowing options.

If you’re looking into obtaining an unsecured loan at this point, it’s likely you fit into one of the following categories:

  1. Have zero collateral to offer at this time, yet need money to pay the bills, expand, etc.
  2. You need funds lightening fast and have the ability to pay the needed loan off quickly.
  3. You’ve just secured the contract of a lifetime and need to cover equipment costs and overhead until receiving the initial payouts.

Unsecured business loans

Should you consider an unsecured business loan?

That’s a decision that only you, the business owner, can make. Sometimes it makes complete sense to leverage your future revenues to meet current needs. In many other situations, a lower-interest loans is the smarter choice.

Pros of unsecured business loans…

1. Faster to obtain funds

This only applies to businesses that can meet the various requirements set out by the lender. With that said, because you don’t need collateral to get an unsecured business loan, the paperwork goes through much more quickly provided your financials are in order and a cheque can be cut within hours.

2. Great way to start/maintain a relationship with lenders

When you’re granted an unsecured loan, there’s much more trust given than with a collateral based loan. The lender has to trust your integrity much more than someone who is signing over their property and investments in exchange for funds. Upon successful repayment, even more trust will be granted in the form of potential lower interest rates and favourable terms on future loans.

3. Unsecured loans are great for sudden time-sensitive growth opportunities

Sometimes an opportunity comes around but once in a lifetime — a company wants to partner up with you on a big project, if you can finance the deal, but they need an answer quickly; a new heavyweight client asks you to ramp up staff and production to meet their needs, or they’ll look elsewhere; a great business investment comes about and you need to capitalize “today”. In such times, you may find you can certainly save the money you need within a few months or a year, but not right now. An unsecured loan can mean the difference between moving forward or getting left behind.

4. You don’t have to lock down your current assets

While unsecured loans are the chosen route for those who don’t have collateral, those who do have property and other assets might prefer to keep them out of the loan documents. This allows you to sell those assets as needed over the term of your unsecured loan, or use that property to obtain lower-interest loans for other ventures.

Small business loans

Cons of unsecured business loans…

1. Stricter lending criteria

While it’s already been noted that you can get an unsecured loan faster than a secured-type loan, the lender will hold your ability to pay back to a much higher standard. Don’t be surprised, they aren’t giving money away to their favourite charity after all! With higher risks involved in lending you the funds you want, expect the lender to ask a lot of questions, and make sure you have documents on hand to prove you’ll be able to pay the funds back in the required time.

2. Only good option for businesses with good credit

In fact, you’ll likely need a spotless credit history in order to qualify for this type of high-risk loan for lenders. As they will have no fall-back option if you default, expect them to delve deep into your business and personal credit history. Any red flag holds the potential to turn off the lending officer in charge of your account.

Repayment terms can be unfair and even unethical depending on the lender:

You can easilyy cross into payday-loan-like territory when taking out unsecured loans. The high interest, short time constraints, and other contract terms of the loan could leave you quickly regretting your mistake. When money is all you’re thinking about, it’s easy to jump in head-long. However, if the lender decides to call back the loanearly, charge unethical fees, or change your interest obligations after the contract is signed, a good deal can turn ugly in a heartbeat with unethical lenders.

3. They cost more

When you miss payments on your credit card, the lender will crank up your rates to reflect the higher risk you pose (and probably to punish you, too!) With an unsecured loan, you’re already in this category, regardless your credit history. This is a huge consideration when choosing between unsecured and secured business loans. If you have the means to secure the latter, it will mean paying far less over time, as opposed to the former. Much like those who borrow money from mobsters, the cost of borrowing can get very high when you take a look at the interest (“vigorish”) being paid over the life of the loan.

There’s no “plan B” if the funds don’t come in:

If you can prove your ability to repay, lenders will happily write you a cheque for an unsecured loan. Unfortunately, the fact that you haven’t signed over your business holdings or the personal property of you and your partners doesn’t mean you’re off the hook if you end up defaulting. All this means is rather than taking your property and selling it soon after the default and clearing your account, the bank will be forced to destroy your credit and send the collection hounds after you.

Ready to start looking?

If you’re ready to make a decision, be sure to take your time, weigh the pros and cons mentioned above, and consider all loan options available to you currently. There are lots of lenders out there, many of whom offer both secured and unsecured loans for your business.

Research is your friend when making any important financial decision for your business. Making a hasty decision at this point can have serious repercussions to your business’s future, including you, your partners, and employees!