Unsecured Loan

Find out all about an unsecured business loan, and whether it is a good fit for your company’s needs.

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As its name suggests, unsecured loans aren’t backed up by any form of collateral; instead, borrowers are assessed based on factors such as their business credit score and strength of cash flow. As lenders take on more risk with unsecured loans, these loans often come with higher interest rates, require personal guarantees or liens - or all of the above.

What are common uses for unsecured loans?

Common uses for unsecured loans include:

  • Fund expansion activities: Unsecured loans can be used to finance a wide-ranging array of growth activities for businesses across industries - from renovation and expansion projects for restaurant owners, to setting up a new branch or acquiring an existing practice for medical practitioners.

  • Overcome seasonality: Flexible financing solutions, such as an unsecured credit line can be a handy tool for balancing out your cash flow across the high and low seasons.

  • Capitalise on time-sensitive opportunities: External financing can make it possible for small businesses to capitalise on fleeting business opportunities that they might otherwise have to pass up on, like taking advantage of limited-time inventory discounts or securing a well-located retail space.

  • Cover unexpected costs: Equipment breakdowns, delays in payments, problems with utilities - these mishaps can happen from time to time, but the last thing you’d want is for these issues to create longer-than-necessary delays in your operations or adverse impacts on your cash flow. With external financing, you’ll obtain the funding you need to remedy the situation in a timely manner.

What are the different types of unsecured loans?

Line of credit

A line of credit, also commonly known as revolving credit provides borrowers with access to a pre-approved sum of capital. Think of it as a credit card; it’s a facility you can draw from as and when you need, and interest is charged only on the amount that is drawn. When the amount drawn is repaid, your credit limit goes back up.

It’s a solution best suited for meeting short term financing needs, such as payroll, seasonal expenses or covering cash flow gaps.

Merchant cash advance

A merchant cash advance (MCA) - sometimes referred to as a cash advance loan - is based on your credit card transactions. Through a provider, you’ll obtain an advance payment, which will be repaid with a percentage of your daily or weekly credit card sales.

It lends itself to businesses with:

  • Large credit card sales: Examples include restaurants and retailers

  • Newly established ventures without a solid credit history:With merchant cash advances, lenders place a greater emphasis on consistent credit card sales, and tend to be less concerned about a borrower’s personal or business credit scores.

  • Seasonal fluctuations: As repayments are based on your credit card sales, you won’t need to make fixed repayments, but can instead pay off lower amounts during lull periods.

Short term loan

Short term loans are financing options set to be repaid within six months. These loans are easier to qualify for compared to longer term loans, offer quick access to funding and are typically used to address immediate financing needs - like emergency repairs or hiring seasonal staff. Examples of short term loans include merchant cash advances, lines of credit and invoice financing.

Tips to help you prepare for an unsecured loan application

Boost your business and personal credit scores

With unsecured business loans, lenders take on additional risk due to the lack of collateral - so they’ll need to ascertain that you have a solid credit history, and can be trusted upon to make consistent, timely repayments. The better your personal and business credit scores, the higher chances you stand of getting an unsecured loan with favourable terms. Here are some tips to help you get started.

To boost your personal credit score, you’ll need to:

  • Pay your bills on timeMaking consistent, on-time payments is a simple, but fundamental step towards having a good credit score. Be sure that you don’t slip up on paying your bills, even at times when you’re making major purchases - such as getting a car or a property - and need to put together a large sum of cash.

  • Avoid unnecessary credit applications:There are two types of checks that are involved in loan applications: soft pull inquiries and hard pull inquiries. The former takes place when an individual or company checks your credit as part of a background check, while the latter occurs when a financial institution checks your credit as part of a lending decision. Hard pull inquiries are listed on your credit report, and affect your credit score. And while soft pull checks don’t have a direct impact on your credit score, it may be noted as a file access. As such, you’ll want to limit the number of applications you make, as you don’t want to come across to potential lenders as an irresponsible borrower or someone who’s in a challenging financial situation.

To improve your business credit score, you’ll need to:

  • Review your credit report regularly:Check your credit report regularly, and be sure to report any mistakes you come across - as even the smallest of errors, such as miscalculations can have an impact on your credit score. If this is an aspect you need help with, you may consider signing up for a credit monitoring service. These services will keep watch over your credit report, and notify you of any changes or potential fraud.

  • Report positive payment experiences:Some vendors may report credit information to the bureaus, while others don’t. It’s best to work with vendors who report their payment experiences - you can verify this by checking with their accounts payable department - but if they don’t, you can add trade references to your credit report through a credit reporting agency.

Where can I get an unsecured loan for my business?

Traditional lenders typically have stringent lending criterias - such as having a minimum operational history of two to three years, or a minimum annual revenue of $200,000 - in place. These terms make it challenging for small businesses and startups seeking external funding.

But banks and traditional lenders aren’t the only options available. Online lending platforms offering greater flexibility, streamlined processes and quicker access to funding can be a good fit for the needs of small business owners.

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