Structured Scaling: Strategising Unsecured Business Loans

Posted On February 7, 2020

Business

If running a business wasn’t hard enough, securing enough of a windfall to ensure its growth can be another matter altogether. 

Loans can be part and parcel of an entrepreneur’s life, and acquiring funding can help an endeavour stay on top of its overheads or spark a scaling process in comfort. 

With this in mind, one of the most sought after approaches to scaling comes in the form of the unsecured business loan. But what makes this type of loan better than others? And how can entrepreneurs go about accessing a temporary windfall through this avenue? Let’s take a deeper look into the ins and outs of the unsecured loan. 

What are unsecured business loans?

Acquiring an unsecured business loan is a funding solution for owners that requires no discernable collateral to be offered up in case a payment is missed. This means that entrepreneurs can rest easy knowing that their personal possessions and business assets won’t be in immediate danger if the company experiences a brief downturn in fortunes.

However, an unsecured loan is more-often-than-not dependant on the borrower to display some form of strong credit rating to be afforded this level of financial freedom. Business owners are also generally required to be capable of showcasing a spotless financial history along with a healthy cash flow forecast for their business. Naturally, because the finance house takes on a higher level of risk involved in granting the loan, a considerably higher interest rate is set up in return. 

In the case of the unsecured business loan, the lender knows that there’s a chance of the borrower defaulting and thus being unable to repay their loan, and it’s this risk that brings in a large repayment amortisation than on that of a secured business loan – for instance. 

Here, the borrower must be capable of showing a thorough cash flow forecast that illustrates how regular monthly repayments – along with interest – can be entirely manageable for the company should the unsecured loan be successful. 

Additionally, the loan period tends to be shorter in time-scale that of a secured loan or collateral-based loan. The amount of interest involved in unsecured loans carries a heavy dependence on the length of the borrowing period. 

How do unsecured business loans work?

The beauty of unsecured business loans is that they offer up very flexible levels of capital for your business to scale with relative comfort, or buy new stock, or hire new employees. These forms of loan can cover virtually any foreseen or unforeseen overheads that you could do with a little help in overcoming and are fairly safe to use. 

The terms of the loan can vary, but commonly take fewer than five years for the business to pay back – however, in exceptional circumstances, very strong applicants with excellent credit ratings can take out unsecured loans over longer periods of time. 

The biggest complication regarding unsecured loans stems from its extremely stringent acceptance criteria for applicants. To qualify for a business loan, entrepreneurs need to demonstrate competence in three fields

Credit history: Possessing a clean credit history brings lenders confidence in seeing a return on their money, but also helps to ease the concern of directors and business principals who will be looking to ensure that the company is in a healthy enough position financially to take on loans. 

Trading record: It’s likely that lenders will want to check that businesses have the means to repay any loans they take on and would seek evidence of this through its previous 12 months of trading. This will mean that newer companies may experience greater difficulty in securing unsecured loans – which risks narrowing their options. However, provided it has a good enough record in other areas, a lack of trading history doesn’t have to be a deal-breaker. 

Personal guarantee: Every loan requires a director to provide a personal guarantee before it takes place. The value that a personal guarantee can add to the act of gaining a loan will depend on the quality of said director’s credit history along with the value of the assets that they possess. It’s worth noting that while a director’s assets will be taken into consideration, they will only be used as an indicator of their respective ability to aid in the repayment process. 

If a business is capable of providing assurances to lenders in all three of these areas, then it’s likely that their loan application will be improved. If they fail to meet expectations in one or more of the required areas then lenders would need to see enough evidence of competence elsewhere. An unsecured loan could still be granted in this case but the rates involved are likely to be higher. 

How unsecured loans match up to secured loans

Unsecured loans carry plenty of advantages. They’re perfect for gaining a small amount of windfall to help you to scale or buy new stock, and their repayment periods can carry a degree of flexibility. 

This form of loan can also greatly benefit established companies that have been trading for over a year already as well as being quicker to obtain with less danger of losing personal assets as collateral. 

However, the higher levels of convenience and safety mean that businesses need a squeaky clean financial record before accessing their cash, and lenders require clear evidence that their money will be repaid – which can make accessing unsecured loans fairly difficult for new or unproven endeavours. 

If your business needs more money that can be repaid over a longer period of time, or has a poorer credit rating, it could be worth looking towards a secured business loan instead.

Secured business loans offer significantly larger amounts of money to companies – typically ranging towards £125,000 depending on the amount of equity of the assets securing the loan. Lenders can be more lenient over repayment periods too, with businesses able to take longer than the common 3-5 year timeframe offered by most unsecured loans. Repayment rates also tend to be notably lower. 

Of course, the reason why secured loans are much more accessible and can involve much larger amounts of money comes down to the fact that they’re secured against property. This means that if you’re struggling to repay the terms of the loan, it’s entirely possible for the lender to repossess your home or any other asset you’ve offered up as collateral. 

On top of this, secured loans tend to take longer to secure due to the heavier level of legal requirements and property valuations involved in the process. 

Which type of loan is best for your business

The safest form of loan your company can access is the unsecured business loan. The fact that you don’t face losing your possessions like with secured loans means that you can sleep easy in the knowledge that, should sales take a downward turn tomorrow, your home and assets will be safe. 

Unsecured loans are also great for giving you a push in the right direction if you’ve been operating for a few years with a good credit history and feel confident that there’s a market that will facilitate your growth. 

However, the secured loan can carry some major benefits too. If you’re a new business that’s dependant on getting access to a financial windfall to help enter the market, a secured loan could be much more effective and healthier than bootstrapping. With more money available and repayable over longer periods, there’s certainly some appeal in this approach. 

It’s imperative that business owners conduct a thorough cash flow forecast and take a serious look at their market and growth opportunities before taking on any form of loan. It’s great to dream big, but businesses work best when entrepreneurs and directors don’t take any gambles with loan money. Be sure to steer clear of uncalculated risks, and enjoy watching your project grow.

If running a business wasn’t hard enough, securing enough of a windfall to ensure its growth can be another matter altogether. 

Loans can be part and parcel of an entrepreneur’s life, and acquiring funding can help an endeavour stay on top of its overheads or spark a scaling process in comfort. 

With this in mind, one of the most sought after approaches to scaling comes in the form of the unsecured business loan. But what makes this type of loan better than others? And how can entrepreneurs go about accessing a temporary windfall through this avenue? Let’s take a deeper look into the ins and outs of the unsecured loan.

Written by Daglar Cizmeci
Investor, Founder and CEO with over 20 years’ industry experience in aviation, logistics, finance and tech. Chairman at ACT Airlines, myTechnic and Mesmerise VR. CEO at Red Carpet Capital and Eastern Harmony. Co-Founder of Marsfields, ARQ and Repeat App.

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