Virtually any business, big or small, needs cash in a flash for short-term needs to sustain growth and development. However, it has been seen that many entrepreneurs fail to devise a proper strategy to run their daily operations and thereby end up in an unwanted financial mess requiring quick-instant-unsecured business loans in order to survive.
There is no doubt whatsoever that business loans form an essential part of any venture and are useful, be it for expansion, development, or starting a new project, and much more. But for those who are already facing a financial crunch, borrowing more money could mean pledging some assets to raise the cash
The question now arises if a business owner would be ready or not to put collateral such as their house, at stake, even though a short-term loan is all that is needed? This is where quick business loans can come in handy because features such as no collateral, minimal paperwork, and quick approvals make them stand out from others.
Unsecured business loans are normally given on the basis of the business owner’s financial documents, income, credit score, years of operation, apart from other factors. Since collateral is not asked for, the element of risk always remains very high, which is offset to an extent by charging a higher rate of interest than other traditional lenders.
Cameron Poolman, CEO of the US SMEs juggernaut money lender OnDeck’s Australian subsidiary, says that rather than availing of a loan it is a big relief for the borrower to know that they can access funds quickly, should the need arise. “A quick no is better than a slow no” he reiterated.
Risks associated with open-ended loans
If you are interested in unsecured funding there is no doubt that there are some notable plus points, but at the same time, there are an equal number, if not more, of downsides also which come with it. So before signing on the dotted line, consider carefully the risks associated with these loans. Some of the considerations to be made before borrowing money are:
Much higher rate of interest: You must realize that the loan industry works on just making money. For example, if you have a bad credit rating and you ask for funds in such a worse position, the higher will be the rate of interest asked for as compared to a secured loan.
Penalties for early pay-offs: Check with your lender whether there are any penalties for early repayment before the loan term ends. It is advisable to review all these factors before applying for a loan.
Big upfront charges: Some loans charge origination fees as high as 6% of the loan amount which can significantly drive up the cost of borrowing. These fees are usually deducted from the final amount in advance resulting in a lesser payout.
Possible increase in debt: While an unsecured loan can be a tool for consolidating the business, they do not address the root cause of the debt. For overspenders, this easy availability of funds can end up racking up the liability, rather than freeing the borrower from debt.
Pre-calculated interest: Before taking a loan ask the lender how the rate of interest will be computed. Some lenders use the payment schedule and charge interest on a compounded rate rather than on simple interest which should be the case.
Privacy concerns: While traditional lending institutions have strict privacy rules, other operators may not be so formal. Some lenders may not respect privacy laws.
Complicated procedure: Since no collateral is involved, these loans are considered as high-risk at the onset only. To offset this risk, the application process is very thorough and eligibility criteria demanding. The lender will scrutinize your credit rating and history of past debts and loans.
The loan amount is smaller: Since no assets are pledged, the loan amount offered will be small. This is because the financial institution does not want to take undue risk to ensure the loan amount is repaid on time.
Tenure is short: In most cases, unsecured loans do not have tenure beyond five years. Since this is considered short-term, it will translate into a high monthly EMI even if you choose the maximum possible time period.
The major drawback of unsecured loans is an increased liability, which makes the borrower personally liable for the repayment of the loan. As a result, the lender can drag you to court and sue you to get your personal assets attached, which you then tend to lose anyway.
God forbid, if you lose the suit, you may also lose your personal property or end up in prison. On the other hand, though personal guarantees may feel like a major commitment, they can help your business secure higher levels of funding.
To sum it up, think carefully and decide whether you really need an unsecured loan from an alternative money lender.
This comprehensive small business guide will help their owners understand the intricacies involved in taking unsecured loans, the reliability of the lender and what differentiates the company from other competitors, terms of repayment, and ultimately the best course of action to follow.
Unsecured loans-a fiscal fallacy?
Irresponsible borrowing often results in irresponsible spending. The question is have we become addicted to borrowing for our business? There is ample proof and even CNN mentioned quick business loans could be addicting.
A study in 2013 showed that since the end of WWII, unsecured consumer credit in the US rose by over 3000%, a figure which should be much higher eight years down the line.
There are many tell-tale signs to prove the fact. Ask yourself if you make only the minimum payments on your repayment bills? Such payments will no doubt keep your business afloat, but are designed to make you borrow as long as possible and end up paying the maximum amount of interest. In other words, if you think you are doing a great job by making the least monthly payment to clear your debt, you are only kidding yourself.
Getting a loan as a temporary measure to tide over your financial issues is okay, but making a loan taking a permanent part of your business lifestyle will never allow you to save any money or get you out of debt.
A cardinal rule to follow is to not borrow money if you are unsure when and how you can repay it. This eventually can become a big burden on your personal and business life. In other words, if you don’t need the money, don’t borrow it just because it is offered to you for your small business. Consider other alternatives before jumping on an unsecured loan.
Past experience has shown that only those small businesses that have no high-value assets stand to gain by taking unsecured loans. Not only do they have the freedom to borrow funds and use them for growth and expansion, they know that none of their assets are at risk and they can work with a peaceful mind.