When should I use Unsecured Loans for my Business?

When you heard or read somewhere about unsecured loans, chances are you’ll hear that they are bad loans, and you should stay away from them as far as you can. Well, as I’m always interested in alternative financing (including investing!) and I learn that even high-interest loans (except those that are coming from loan sharks!) can be great sources for your business – if you know how to manage them.


In this article, I’d like to try answering this question: “When should I use unsecured business loans.” But first things first: Why would you need an unsecured loan?


The why’s

If you are a long time reader of Noobpreneur.com, you might remember that I once owned two business service shops (of a then-leader of the local franchise scene). Let’s just say that a multiple issues ranging from managerial to economic downturn pushed me in the corner, and I had to let both go, and start something else – fast.

Now, if you are in the similar situation like I was, I’m sure that you understand that your funding options for your next business are limited. Very limited. Even with good credit records and sound business plan, you’d face difficulty when proposing for a business loan with a bank. Things are even worse if you have a bad credit rating due to your business failure.

In short, your need to find creative sources for your business funding.

Friends and family are the best for this purpose. But if you are like me, who funded my failing business with my family’s money, you’d think twice before you propose yet another loan request. Why? It’s simple: I’ve lost their money, and I can’t afford to do it again, even I know that I’ll make things work on the next business – which I did and still do.

Your next option is to take a personal loan – either secured (backed with your assets) or unsecured (expensive interest). Depending on your business funding needs, I do have an inclination toward unsecured loans, because they offer benefits that other type of loans don’t.
So, when do you need it?

Of course, like any other loans, you should think twice before taking any loans. But when you need it, unsecured loans can be a powerful solution for your business.


photo credit: TaxRebate.org.uk

In taking loans, timing is everything. There are several scenarios that can show you the right situation for taking an unsecured loan:
1. You need bigger loan amounts

Starting out a business or taking your small business to the next level often take quite an amount of working capital. Regardless of your credit rating, access to a sizeable amount of money for your business is always limited.

You may not realise it, but secured loans are typically offering you lower loan amounts, depending on the collateral’s value that you use against your loan. With unsecured loans, you can take higher loan amounts. Aspire Money, for example, can offer you up to £100,000 of working capital. Kabbage, to compare, can offer you up to $100,000. Of course, the actual amount depends on several criteria that you should meet.
2. You don’t have collateral to back your loan against

Unsecured loans – hence the name – mean that you take the loans without any collaterals, which make them suitable for a business owner who don’t have assets to back the loan against.

You could use your house as a collateral for a personal loan, and use that loan for your business’ purpose. But that’s not an ideal scenario for many. It’s always the best practice to separate business and personal assets and liabilities.
3. You need a line of credit or safety net

For the right reasons – e.g. Securing a large amount of supply at lower price tags due to time-limited special offer – unsecured loans can give you the much-needed capital, fast. Many unsecured loan brokers can offer you same-day approval and access to your borrowed money, so you can take action faster.

Indeed, unsecured loans can act as your business’ line of credit or safety net, offering you a flexibility in making funding available as needed – something that secured loans can’t offer you effectively.
Takeaway

Every business venture involves risk-taking. Business owners should be well-versed in taking controlled risks. This also applies for securing working capital or line of credit in the form of unsecured loans.

Unsecured loans are like double-edged swords. If you are not careful in managing them, they can hurt you (read: Plunge your business deep in debts.) With that said, you need to use unsecured loans for the right reason, at the right time.

I always against taking more loans to repay existing loans, because not many business owners can manage that (a pro can help you, though.) So, if you think unsecured loans can help you repay your old loans, I urge you to think again.

So, what’s your next step? Do your due diligence: I’d suggest for you to find more information on unsecured business loans; ask your partners, suppliers and the local chamber of commerce for recommendations. You should also consider other potential funding options – peer-to-peer, crowdfunding, and any other options, and consider the pros and cons of each option. Then you can make a well-informed decision.

Please note that this article is for informational purpose. As always, the best route for you is to seek professional help who can help you determine whether unsecured loans are suitable for your business funding needs.