Planning to expand your business but not sure how to arrange for the necessary funds? Consider getting a business loan. However, it might seem like a worrying proposition if you do not have any assets to pledge as collateral. You might have heard that lenders usually need an asset against which they sanction the loan amount. But this is not the case always. You can go for a collateral-free business loan if you are just starting up or lack valuable assets. There are many advantages of getting such a loan, as listed below:
1. No Collateral required- An unsecured loan allows you to get the money you need without having to put up any asset as collateral or security. It is not necessary to secure the loan with a residential property or commercial property, vehicles, or any other asset.
A collateral-free business loan is a flexible solution for you to build your credit history without having to risk losing your assets in case of a payment default. However, according to another school of belief, if there is no collateral, there is no accountability. Your lender may take legal action to recoup the funds they have sanctioned in case of an unsecured business loan.
2. No Restriction on Usage- One of the major drawbacks of traditional forms of funding is that you cannot use the funds as per your wish. For most loan products, the lender will ask you to provide a detailed description of how you plan to spend the funds.
However, you can utilise an unsecured business loan in whatever way you like. Most financial institutions do not even inquire about your intention of using the allotted funds. It is entirely up to you whether you use it for machinery installation or for hiring additional workers. You can also use the funds to conduct research and development, expansion of your business, or for anything else your business demands.
3. Quick Approval- If you own a business, you will always need money to meet your financial commitments. If you are not getting your funds on time, you might miss out on some great opportunities. As such, an unsecured business loan is a one-stop solution for immediate funding needs.
Consider the following scenario: You are in desperate need of money, but instead of applying for an unsecured loan, you have applied for a secured loan backed by a commercial property. Your lender will examine your documentation first, then examine the property’s value, ownership deed, and other factors. The entire procedure will take a long time to complete. So, are you willing to go through such a lengthy procedure? Probably not!
For an unsecured business loan, all you need is a good credit history and a steady income. Since no asset is involved, the processing is relatively fast. The interest rate and collateral-free business loan amount are determined by the applicant’s personal profile.
4. Builds Credibility- One of the greatest benefits of collateral-free business loans is that it helps to build your credit history. This loan form is one of the greatest ways to develop a strong credit history if you are a first-time applicant.
However, for that, you must pay your EMIs on time. Try to avoid any default. By using this loan form, if in the future you require a larger amount of money for your business, you will have strong creditworthiness to back your loan application form.
5. Helps in Maintaining Working Capital- If you are running a business, it is necessary that you maintain adequate working capital to meet your daily requirements. Small businesses, on the other hand, often find it challenging to sustain positive cash flow due to irregular client payments, outstanding invoices, and other operating expenses.
Unsecured business loans serve as a cash cushion for businesses. It allows business owners to easily meet their daily obligations such as paying to daily wage workers, inventory stocking, paying rent of the commercial premises, paying to suppliers, and more. As a result, instead of being burdened by short-term financial requirements, you can focus on the big picture of your business through an unsecured business loan.
Collateral free business loans are a quick way to avail the funds you need to run or expand your business. You will not lose any asset in case of default and the processing is usually fast too. Just make sure you repay the loan on time to build a great credit score for future applications.
Danis Woods in Businessman, investment banker and stock exchange traders. On the same time he loves writing financial blogs to shed lights on different aspects that new and existing businessman are not aware of.