The most pressing problem for most entrepreneurs and small-scale businesses is none other than “capital”. One may have a lot of ideas and innovative ways to start a new business. But, to get it started, people need few things. Today, there are many options available — right from business loans to finding angel investors to raise the required budget to get a business up and running. Also, being able to sustain a business in the initial years is not easy and small businesses often need cash to keep them running or afloat, until the business can sustain on its own. If you are breaking your head about getting someone to invest in your idea and get the required capital to setup your business, read on! Here is a quick guide to understanding unsecured business loans and how they can help you get your business roaring?

Defining A Loan

Overview Of Unsecured Business Loans

A loan is typically a sum of money that a person or a company borrows from another person/company, banks or financial institutions. Loans tend to run for fixed tenures within which the borrower must repay the principal along with the interest. The payments by the borrower may be made in monthly installments or quarterly or as per the terms of the loan agreement. Loans facilitate rotation of money between a person who is in need of money and a person/company who can lend money and make some profit out of it. Loans often require collateral or guarantees from credit worthy people so that in case of a default, the collateral can be used to recover the loan. In the case of a guarantor, he/she is responsible for paying back the loan in the case of default by the person/company obtaining the loan.

What Are Business Loans?

When a loan is advanced towards funding a business, it is termed as a business loan. Business loans are advanced by banks, financial services companies, non-banking financial companies and sometimes even by moneylenders. It is advisable to avail a business loan from banks or financial institutions to ensure fair lending rates and smooth processing. There are classifications to a business loan and they are:

  • Secured business loan
  • Unsecured business loan

A secured business loan can be availed when the company has been running for a while and has solid financial statements. In such a case, the company or business availing the loan is required to pledge collateral such as an industrial plant, property, vehicles or equipment as a security for the loan advanced. In the case of an unsecured business loan however, they will be no collateral. Read on to learn more about unsecured business loans.

Unsecured Business Loans – An Overview

Banks and financial institutions lend unsecured loans for businesses and these don’t require you to pledge any collateral. The rates at which these loans are lent are usually higher than that of loans that are lent against security. These loans may be availed as credit cards, personal loans, payday loans or corporate bonds. The rate of interest charged varies from lender to lender and is dependent on the credit worthiness of the borrower and the borrower’s past history when it comes to loans and financial dealings.

Higher Interest Rates In Unsecured Loans

As mentioned earlier, the interest rates charged for unsecured loans are usually higher than that charged for secured loans. This is because in the latter case, the lender can take possession of the property or equipment or plant and sell it to make up for the loan. In the case of an unsecured loan though, the lender has no such recourse and the risk is considerably high. This raises an interesting question why then would a lender bother giving an unsecured loan. Read on to learn about it.

The credit rating or the credit worthiness of the borrower comes into play here. Also, the borrower would have to convey to the lender pretty clearly why financing his business is a good idea, and project a realistic idea of the working capital required. A background in the business that you are about to venture into would be another advantage and banks and finance companies would consider that favorably when you apply for a loan.

Tips For Getting The Best Unsecured Loan For Your Business

Here is a list of a few things that banks and financial companies look at when you apply for unsecured loans.

  • Age is an important factor. Usually financial institutions prefer individuals between 24 years and 65 years for such loans.
  • Business Experience is another key factor. If your business has a good financial record of accomplishment, you are sure to get a loan and your profit numbers can help you a lot in this context. You can avail up to 80% of your profits as loan from certain institutions.
  • An experience of more than 5 years or at least 5 years in the business is something that these institutions look for.
  • The entities and professionals eligible for a loan under this head are:
    • Proprietorship companies
    • Partnerships
    • Limited Companies
    • Self Employed individuals
    • Doctors and other professionals who practise by themselves

Things You Must Look At To Secure The Best Loan Option Available

  • Work out the exact amount of money you would need for your loan and be prepared to explain the figures you’ve arrived at.
  • Look at various financial institutions and banks to get the best rates and apply to more than one institution just in case.
  • Get your credit report and submit it along with the application to make a favorable impression.
  • Be organized and present your proposal and ideas supplemented by data to impress your case upon the lenders.

It is imperative to remember that availing an unsecured loan for your business hinges on your credit rating, your business experience and the merit of your idea. Your presentation and marketing skills are sure to come in handy when you approach any institution for a loan.