Secured vs unsecured finance
Business finance falls into two distinct categories: secured and unsecured. Although these terms don’t sound appealing, and could scare some, they simply refer to whether collateral (‘security’) is attached to the loan.
When finance is secured, some form of collateral is a loan requirement. This usually takes the form of commercial or residential property. Many small business owners use their homes as collateral for secured small business loans. A common form of business loan that requires collateral is a bank term loan. With this type of loan, a business will need to complete a large amount of paperwork, which can include a business plan.
With unsecured finance, no collateral is required. When applying for a business loan that is unsecured, the lender will use other lending criteria to make a decision. Criteria used to make lending decisions include credit history, credit score, cash flow and the perceived ability of the business to repay the loan. Keep in mind that personal guarantee can be required when seeking this type of business finance. This means that your personal assets can be used to cover the outstanding debt if you are not able to repay the loan amount.
Types of unsecured finance
There is a range of financial products available for this type of finance, including business credit cards, business lines of credit and overdrafts, loans from family and friends and online business loans. Here’s what you need to know about each.
Business credit cards
Although not recommended, some small businesses use credit cards as a form of unsecured finance and one way of getting a business loan with no assets. These can be used to make business purchases and be repaid over time. This main shortcoming is that this type of finance can be expensive, especially if an outstanding balance is kept on the card. Get tips on choosing the best business credit card for your needs.
Business lines of credit and overdrafts
These two forms of finance are similar in that they are revolving credit. This means that you can draw and repay when it’s convenient based on a predetermined credit limit. With a business overdraft, you ‘overdraw’ your transaction account to access the funds. With a line of credit, these funds are usually in a separate facility, so you transfer them to your account as needed. With both of these forms of finance, you only pay interest on the amount. Also, business overdrafts and lines of credit are available in secured and unsecured versions. The difference is that the unsecured ones have a higher interest rate – typically around 1.5 times higher. This is because there is a greater risk for the lender when the finance is unsecured. Learn more about unsecured business overdrafts and business lines of credit.
Online business loan with no assets
These types of unsecured loans have been growing in popularity in recent years. Online business lenders, such as Moula, apply cutting-edge technology to make lending decisions. Instead of using property to secure the loan, Moula looks at your accounting data to see the health of your business and determine how much you can borrow. The streamlined process means that business owners will often get an answer within 24 hours, or one business day. Online business loans are usually short term, with loan terms between six months and three years.
Find out more about online business loans as a finance option.
Buy now, pay later for business-to-business transactions
One form of unsecured business finance that’s growing in popularity is buy now, pay later. With this form of finance, businesses can purchase products and services and get an extended period to pay, instead of the typical 30-day invoice terms.
Moula Pay is a buy now, pay later solution that enables businesses to purchase goods and services. They get a three-month interest-free and repayment-free period, and then an additional nine months to pay the balance (subject to monthly interest). Find out more about the Benefits of Buy Now Pay Later for Business.
Consider the options for getting a business loan with no assets
Not having assets should not stop you from getting the finance you need to maintain and grow your business. Your options for getting a business loan with no assets will depend on your situation, including the purpose of the finance and how long you need it for. In general, it is possible to get a business loan without security.