In an advancing world fuelled by innovation-led growth, entrepreneurship is the engine of advancement. It is inevitable that such circumstances would see a general affinity for loans from lending agencies. When it comes to the kinds of loans available, we can broadly categorise them as- secured business loans and unsecured business loans. While the former is a kind of loan that usually has a property asset as a collateral for banks and lending agencies which could be appropriated if the loan is not paid, the latter does not carry any such collateral. Thus, the risk of the lending institution is higher with respect to unsecured business loans. In such a situation, it is important for us, as business enthusiasts, to understand the nitty-gritties of the latter and the ways to access them. Also, it is important for business enthusiasts to know the benefits of entrepreneurial loans. You can check more about  yrittäjälaina parempi kuin finnvera (entrepreneur loan better than Finnvera).

Secured Loans

It is understandable that secured loans are the commonest kinds of loans since lending institutions do not wish to carry any burden of risk. Besides, while lending to start-up ventures, secured loans are sometimes the only option as the maturity of the start-up and its future are not guaranteed in any shape or form. The most common kind of secured business loans is what is known as a mortgage. This involves the attachment of the individual’s house or property to the loan, which is appropriated if the individual fails to repay the debt within a stipulated period of time.

Is there an Unsecured Business Loan or Loans that are Secured in Alternate Formats?

As we can very well fathom, it is difficult to get hold of an Unsecured business loan that does not involve collateral in a concrete shape or form such as a car or property. However, there are loans that are relatively less secure or unsecured. These involve the presence of collaterals but not in the way we want to perceive them in the case of traditional loans. The various alternatives that exist to traditional collateral-based loans could be summarized as follows:

• Loans on personal guarantee: A loan on the personal guarantee is an instrument of transaction in business organizations where the payment of the loan is made buy the lending agency subject to the condition that should the company default on the payment of loan, the individual would make the payment.
• Loans against blanket UCC Lien: In the case of a loan payment made against a blanket UGC loan, the lending agency makes the payment without the attachment of collateral. However, the terms of payment require the company to access to the lender’s ability to appropriate the company assets as a compensatory sum equivalent to the unpaid amount in the wake of a default of payment.

As it is quite easy to gauge from the avenues listed above, the complete absence of collaterals with respect to traditional loans, albeit unsecured in name, is a distant possibility. Thus the access to more risk-free unsecured business loans would compel us to walk the extra mile to navigate around options that are not of the conventional variety of loan transactions.

Other options of securing a small business loan free of collateral

The following options are available to those who are looking for other options to access an unsecured business loan:

• SBA Loans

These are loans that are a favourable option for start-up enterprises and business entities who wish to undertake risk-free transactions. These are small business loans that typically do not require the attachment of any collateral. As a stimulus to business development, a federal agency, Small Business Administration, usually provides backing for such loans. 

The only point of concern with respect to this is the fact that they typically require lengthy periods of approval and vigorous background checks of the profile of the borrower.

• Online term loans

With the digital marketing scheme getting a huge makeover, nowadays, the diversification of loan accessibility is definitely a good development. Various lending entities can offer online loans. These could be both short-term and long-term loans. In the latter case, a lump sum of money is advanced to the borrower, and the process of repayment is usually done on a monthly basis. In the case of short-term loans, the sum of money advanced is repaid on a weekly or daily basis stretching over a period of up to 18 months. Needless to say, both these kinds of unsecured business loans are not as cheap as SBA Loans, and the price of short-term loans are usually higher than long-term loans.

• Merchant Cash Advances

Merchant Cash Advances (MCA) are a form of loan payment where collaterals ate required but not in a straightforward manner. The payment of loan is made on the assurance that the company that takes the loan must part with a certain percentage of its future profits as a form of repayment. Thus, unlike traditional secured business loans, Merchant Cash Advances actually rely on the progressive assets of the company to secure its repayment.

Unlike SBA loans, these do not require too much screening for eligibility. However, the downside is that the terms of negotiation could turn out to be complex, along with the presence of a plethora of fees for various procedures.

• Business Credit Cards

It is almost impossible to believe that people are unfamiliar with business credit cards, given the huge popularity that they have garnered. They could actually act as add-ons to one’s traditional loans, especially in cases where the introductory period of the loan payment is virtually free of interest. This typically does not stretch beyond a period of 15 months. However, the amount of money saved even within this duration could actually be of immense help to small businesses and upcoming ventures. It is always better to check the terms and conditions of payment in these cases as one will have to comply with the normal interest rates after the completion of the introductory period.

• Private lending entities and fintech enterprises

Many private lenders are now considering diverse options of loan payment owing to the demand for loans in recent times. Amongst a wide variety of options, one of them could rest on the idea of a relaxed choice of collateral. Thus instead of fixed collateral options in the form of car or mortgage, options such as a different individual assurer or co-signer also can be exercised. Although these are not completely collateral-free as such, it gives one the ability to consider various forms of securities and collaterals.

It might be stated, therefore, that the ultimate choice of a Business Loan depends on the needs and requirements of the particular enterprise or individual. Some might be concerned with the issue of time while others might prioritize terms of the agreement and/or price over everything else. Thus, the table illustrated above will help one make a clear and prudent choice as it lists the relative advantages and disadvantages of all such loans.

Necessities before opting for a small business loan

Before one considers the option of availing an unsecured business loan, there are a plethora of considerations that one ought to make. These could be summarized as follows:

• Self-evaluation of the credit score of the individual and/or the company
• Ensuring that the balance sheet of the enterprise is up to date
• Drafting reports related to the profit and loss statements of the company along with the cash flow statement
• Revision of business expenses

Terms to Consider before Signing the Dotted Line

While the eligibility conditions of almost all loans depend on the parameters outlined in the above point, there are some key factors worth considering before one agrees to sign the Dotted Line.

First, the terms of the loan agreement must be carefully scrutinized. One must specifically pay good attention to the interest rates, pay out period, loan term, payment schedule and the annual percentage rate (APR). 

Second, loans like MCA which are relatively easy to access and avail might require various procedures of settlement with fees involved in each. One must be very careful about the nature and kind of fees involved.

One must always check whether the loan carries a personal guarantee or UGC Lien. This is because no matter how sincere one’s intention of repayment is, the impact of a possible default on ones business is worth considering seriously.