Unsecured loans or unsecured debt essentially refers to any type of obligation that is not protected by a guarantee or doesn’t have a solid asset backing it. Loans and credit that do not have collateral at their back end are referred to as unsecured loans, and in case the borrower defaults on their loan payments and declares bankruptcy, the lender has a general claim over the borrower’s assets once all secured lenders have been accounted for.
While secured loans obtained through traditional banking channels require tons of paperwork and documentation and can be a nuisance for businesses in a hurry, unsecured business loans are easier to obtain. The only drawback, however, is that unsecured business loans come with a higher interest rate due to the innate default risk involved in them. Given below are three benefits that unsecured loans pose for businesses:
1. They offer an instant cash injection
Irrespective of the operational side of their business, both big and small businesses often require cash injections in the short term to fulfill additional financing needs for their business. Even businesses that are doing well and making profits require cash injections to expand the scale of their operations, fulfill inventory, pay suppliers, to fulfill monthly obligations while they wait for their clients to pay them back depending on their credit cycle.
Depending on where they operate, business owners are likely to find unsecured business loans easily – for instance, an Australian business could easily find access to unsecured business loans in Australia.
2. They have a short application process
Unsecured business loans are characterized by a short application process. While traditional financial institutions have an intensive and comprehensive application process, which can often be pretty overwhelming. Traditional lenders vet each application they receive to make sure that the borrower can pay them back at a later time, place value on collateral, and on determining its market value. As the saying goes, a bank will only lend you money, once it makes sure that you do not need it.
Unsecured business loans, on the other hand, only pay attention to factors such as the business’s prospective growth, its sales reports, and the potential to approve business loans. Unsecured business lenders have a streamlined application process that takes no more than 24 hours to be processed.
3. They do not require collateral
Many small businesses do not have valuable assets or collateral backing them. For instance, most high-growth startups that have high potential in the technological domain may be projected for millions of dollars in sales in the coming year, may lack substantial assets, and hence would be ineligible for a traditional business loan. Most startups struggle to get financing from financial institutions due to this very reason.
However, unsecured business loans do not require collateral and small businesses can hence get a loan based on their potential and future growth. Unsecured business loans, however, do require a personal guarantee that may state that in cash on non-payment, the lender may claim for the borrower’s assets.
Conclusion
Unsecured business loans can be very helpful for businesses struggling to meet ends, or requiring cash flow to run daily operations and obligations. The above-mentioned benefits of unsecured loans detail why businesses should look to them in times of dire need.