Start-ups need significant amounts of money to expand their operations in the initial phase, but a lack of assets can hamper their chances of getting a secured loan. No security business loans are the ultimate solution to all their problems in such a situation. These loans are ideal for small and medium-sized enterprises as borrowers can obtain them without providing any collateral.
Unsecured loans are issued based on the borrower’s creditworthiness, and no collateral is required. As a result, the lender cannot take over any asset owned by the businesses to repay the loan. However, the borrower still needs to meet specific income and credit requirements, and in some cases, the commercial lenders can even demand a personal guarantee from the business directors.
What Is Meant by Personal Guarantee?
A personal guarantee refers to a written promise issued by the business owner guaranteeing the repayment of a loan. In the event of a default where the business cannot repay the debt, the individual guarantor is held personally responsible. If any person signs a personal guarantee and cannot repay the loan, it can hurt their credit score.
Why Are Interest Rates of Unsecured Loans Higher Than Others?
No security business loans carry more risk than secured loans because no asset is taken as collateral to safeguard the debt. As a result, the uncertainty of recovering the money increases, which is reflected in a higher interest rate. An inflated rate of interest signifies a higher level of risk to the lender. However, the businesses enjoy the freedom of not having to tie their assets to the loan itself.
Which Companies Can Benefit from Unsecured Business Finance?
Businesses of all sizes can apply for no security loans. However, they are most suitable for companies that are:
- Facing urgent need of funds and want the loan to be approved quickly
- Operating for less than two years
- Having a credit history that is less than perfect
- Willing to pay a higher interest rate to get easy access to the funds
- Lacking in owning valuable assets
What Are The Eligibility Criteria to Qualify for a No Security Loan?
There are a few essential criteria that the borrower has to meet to obtain an unsecured business loan. The requirements include:
1. Income requirements:
The borrowers must provide the lenders with a proven record of stable business income. Companies having a turnover of $60,000 per year or above can apply for this loan.
2. Business requirements:
The period for which the business is running is also taken into consideration to ensure that the borrowers are established organizations only. Companies must actually be in operation for at least six months to acquire this loan.
3. Credit history:
The lenders always check out the borrower’s credit history. Even though businesses with a not-so-perfect history can also get approval, the loan providers still review every application to assess the risk level better.
4. Use of funds:
How the funds will be used also impacts the chances of qualifying for the loan. If the borrowers provide a clear-cut plan of their long-term and short-term goals and how they will spend the capital, it increases the loan’s chance.
No security business loans are tailored-made finance solutions that are based on the business’s health and the owner’s ability to repay. If the borrower is indeed confident that they can repay the loan quickly, these loans can be highly beneficial for various business needs.