You might have heard the term "unsecured business loan" in relation to business finance. If you're not sure what this is, here's a quick summary.
Many types of loans can be secured or unsecured. With a secured loan, an asset or other form of collateral is used as security for the loan. For example, when you purchase a home, the home and land are the security for the mortgage. This means if you can't make your payments anymore, the lender can sell your home to pay the money owed for the remaining loan balance.
Also, with some types of equipment finance, the equipment itself is the security for the loan. For example, if a printing company purchases a large printing press, it can get a loan based on the value of the asset. If the business can no longer make the agreed payments for the press, the lender can take back the asset and sell it to recoup the funds it lent.
Traditionally, many business loans have been secured, either with personal or commercial property. For example, a business owner can use the family home as security for the business loan. Often, small business owners have ongoing loans secured by personal property. This can put the personal home at risk if problems arise in repaying the loan. This is one of the biggest shortcomings of secured business loans.
Another challenge with unsecured business loans is that it takes time to analyse the asset and complete the paperwork to use it as security for the loan. It can take weeks and sometimes months to analyze the lending application and assets to make a decision. For businesses needing fast business loans, this is usually not an option.
Given these challenges, some businesses opt for unsecured business loans. Other forms of unsecured business finance are also available, including business lines of credit and business overdrafts.
