The Unexpected Security of Unsecured Business Loans
By J Ferrer|
February 7, 2024
Imagine you’re a small business owner sitting down at your laptop or scrolling through your smartphone, Googling funding solutions for your growing enterprise. You’re more than likely to encounter the term “unsecured business loans”. “Hmm,” you might think to yourself. “That doesn’t exactly sound like the kind of funding solution that gives a business owner the financial security they need to grow and flourish.”
Ironically, though, the “unsecured” part of “unsecured business loans” has nothing to do with the effect they can have on your business. Small business loans can be secured or unsecured. In the simplest sense, secured loans are backed by collateral, whereas unsecured loans are not. One is not necessarily better than the other — the type of loan that works best for you depends on the needs and circumstances of your business.
Choosing a funding solution that is optimised for your business begins with a more detailed understanding of how an unsecured loan functions, how it is different from a secured loan, and the pros and cons of each type.
What are unsecured business loans?
Unsecured business loans are business loans that do not require the business to put up assets as collateral. Collateral is any asset (such as real estate, business equipment, accounts receivable, or inventory) that you pledge as security to be forfeited in the unlikely event of a default on the loan. Instead, lenders who offer unsecured business loans will typically review other indicators of creditworthiness, such as your credit score and the business’s trading history.
Unsecured business loans are available from both traditional and alternative lenders. However, traditional lenders generally require a very long trading history before they will consider a small business as a candidate for an unsecured loan.
What’s the difference between secured and unsecured business loans?
The primary difference between secured and unsecured business loans is that the former requires the business to pledge assets as security, whereas the latter does not. However, there are more nuanced differences between secured and unsecured loans as well.
Flexibility on collateral
Secured loans always require collateral as security, no matter what. Furthermore, the value of the asset typically needs to cover 80-100% of the principal amount named in the loan terms. Finally, the terms of a secured business loan authorise the lender to seize these assets in the (very unlikely) event of a default. This can make them an unfavourable funding solution for small businesses that have not yet amassed high-value assets like property or vehicles to pledge as surety.
On the other hand, you have the option of applying for an unsecured business loan whether a) your business has no assets to offer as collateral or b) your business has assets to offer as collateral, but you’d prefer not to put them on the line.
Length of repayment plan
The terms of a secured business loan typically offer larger principal amounts with longer repayment plans, whereas unsecured loans typically offer smaller amounts but require the business to remain in debt for less time.
Ultimately, however, the ideal lender will equip your business with flexibility so that you retain autonomy over your use of any business lines of credit.
Because unsecured business loans do not require that you put up any physical assets, there’s no need for the lending process to include an asset appraisal stage. This can save a lot of time, typically making the process of qualifying for an unsecured business loan much, much faster than a secured business loan.
How do I know if unsecured business loans are the right funding solution for my business?
Unsecured business loans are best suited to businesses that:
- Have a robust credit score
- Do not have assets to put up as collateral
- Does have assets to put up as security, but does not wish to put them at risk
- Are seeking efficient access to capital and do not want to wait for assets to be appraised
Perhaps your business just needs quick and easy access to cash flow solutions. Perhaps you’re simply seeking to capitalise on a windfall of a business opportunity without sinking company time and assets into a lengthy secured business loan application. Or perhaps you simply prefer shorter repayment terms.
Whatever your reasons, an unsecured business loan is a favourable solution for all the scenarios described above. Your next step is simply finding a lender with a range of secured and unsecured financing solutions crafted specifically to meet the needs of growing South African businesses.
In that case, look no further than Bridgement. Access up to R5 million in business funding in 24 hours or less when you apply online. No paperwork, no lengthy asset appraisal, and no inflexible terms. Just business funding, simplified.
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