What is unsecured business finance?
By definition, unsecured business finance does not require assets for security. Secured finance, on the other hand, requires collateral which is usually in the form of residential or commercial property. Although unsecured business finance does not require collateral, the borrower’s assets can be at risk if the loan is not repaid and will result in a bad credit history.
Types of unsecured business finance
There is a range of options available when considering unsecured business finance:
This is what comes to mind when most people think of a bank business loan. A term loan is for a fixed period and has a regular repayment schedule. The main shortcomings with bank term loans are that they require a large amount of paperwork – which can include a business plan – and can have long approval periods of up to two months. With complicated application processes, bank term loans are not very effective when a business needs funds fast. In addition, bank lenders have cut back on the finance offered to SMEs.
A business overdraft enables to you draw extra funds from your regular business transaction account up to a certain amount. For example, if you have a $25,000 business overdraft, you can have a negative balance up to that amount. You only pay interest on the funds you are borrowing at a given time. So if you are only using $10,000 of the overdraft, you will only pay interest on that amount.
There is usually an establishment fee and a monthly accounting fee while the business overdraft is available. One drawback with a business overdraft is that it can be withdrawn by the bank at any time which could be very difficult if you are having cash flow challenges, to begin with.
Business line of credit
A business line of credit is similar to a business overdraft but it’s not automatically connected to your transaction account. You can draw the funds you need up to the limit of the overdraft and repay the borrowed money in that amounts and at times that suit you. This makes it a flexible business loan solution. In addition, a business line of credit is a longer-term solution than a business overdraft.
Note: It should be noted that term loans, business overdrafts and business lines of credit are also available in secured versions. When secured, the interest rate is lower and more funds can be borrowed.
Business credit cards are another form of unsecured business finance. There is a range of choices with business credit cards. No frills cards come with lower fees and lower interest rates. Business looking for more features, such as travel points and travel insurance, will pay higher fees and interest rates for their cards. Business credit cards can be an effective form of short-term unsecured business finance as most offer a 55-day interest-free period.
Short-term business loans
These have been growing in popularity as unsecured small business loans due to the speed and ease of getting approved and funded. Fintechs (financial technology companies) have developed online platforms where you can easily apply for loans. This includes safely and securely analysing your finances, including bank statements, online to determine your eligibility for this form of unsecured business finance. An answer is usually provided within 24 hours. Depending on the lender, the loan amount can range from $5,000 to $1 million and the term can range from between three months and two years.
Learn more about unsecured business finance from Moula.
Making a decision
Whether you need working capital or want to grow your business, unsecured business finance might be an option that meets your needs. As with any financial products and services, always check the terms and conditions. Determine whether you can make the repayments and look for hidden fees.
Moula and a handful of online business lenders have created a loan comparison tool called Smart Box. This is a simple one-page document that clearly shows loan costs, and whether any fees or charges are attached to the loan. Moula unsecured business finance does not come with any fees or charges, so you won’t get any unpleasant surprises with a business loan from Moula.