How Unsecured Business Loans Work in Canada
Banks and traditional lenders usually require that a business offer some form of collateral security to approve a business loan. Few banks offer unsecured business loans, especially to start-up companies or those with bad credit.
However, there are ways to get unsecured loans from other sources as well, eliminating the need to put personal or business property at risk. The financial climate of today has financial companies to offer unsecured business loans. There are a vast number of lenders ready and willing to get the business of owners who prefer this type of loan to a secured loan.
This article covers the following subjects about unsecured business loans:
- The differences between secured and unsecured loans
- How to apply for unsecured business loans
- Non-payment of unsecured business loans
- Fast facts to help with the process
The Differences Between Secured and Unsecured Loans
Basically, secured loans are money that is borrowed with collateral placed as security against nonpayment. For instance, for individuals who get auto loans or home mortgages, the car and the home are the security which ensures the loan will be paid. If not, the lender has the right to take possession of the property. The same is true for secured business loans. Property is put up as collateral so that the lender has less risk of default.
A business loan can be secured with property such as:
- The actual business, or a portion of it
- Equipment, such as business vehicles
- Buildings or land
On the other hand, an unsecured business loan means that collateral is not needed to guarantee the loan. As such, they are more frequently approved for well established businesses with good credit. This can be quite a relief for a new business, or one that does not have collateral that is adequate to be used as security against a loan.
How to Apply for Unsecured Business Loans
Applications for unsecured business loans contain much of the same information as other business credit such as equipment loans, start-up loans, and business equity loans. Applicants should come prepared to document their information, financial statements, tax records, and other common records that are requested.
Though each lender is different, qualifications for unsecured business loans may also include:
- A good to excellent credit score due to the level of lender risk
- A concise and solid business plan showing how the loan will help increase revenue
- The understanding, willingness, and ability to afford a higher interest rate
The most current advice which circulates about unsecured business loans is that the borrower make the extra effort to shop around for lenders. Sometimes, business owners can get a better offer from the large bank they have been doing business with than an online lender who promises they offer the lowest rates possible. The business owner should never approach a loan officer for a loan unless they are fully prepared with all paperwork and documentation.
Non-payment of Unsecured Business Loans
For many reasons, unsecured business loans have been an enormously popular financial product. In fact, the demand for these loans has grown tremendously in just a few short years. There are, however, consequences if an unsecured business loan is not repaid. Business owners should have a clear understanding of what can happen if a loan is unpaid, and do everything they can to avoid that possibility.
A lender is taking a huge risk to offer money to a business without security collateral. But this does not in any way mean that the lender has no way to recoup the money if the business owner does not pay. The initial collection step after nonpayment is usually a lawsuit filed against the business, which will seek the money owed plus interest, fees, penalties and other costs.
The lawsuit process moves fairly fast, and the lender will get a judgement against the business.
This means that the lender can use several means to collect their money, like:
- garnishment of business bank accounts
- placing a lien on the business’ real estate
- placing a lien any vehicles to which the business holds title
Sometimes, the lender requires the owner to allow them to co-sign with the business. In these situations, collection activity for non-payment escalates to the extent that the lender can go after personal accounts and assets of the business owner.
Navigation through the unsecured business loan process can be made a bit easier when the business owner is equipped with helpful information.
Here are some facts which may be useful to the applicant:
- Unsecured business loans are available in both long-term and short-term options.
- Borrowers may be offered a fixed or variable interest rate; though a fixed rate is preferable.
- Unsecured business loans often come with a hefty prepayment penalty; business owners should inspect any offer carefully for clarification on this fee.
- Small businesses are more suited to unsecured business loans since they often lack a good credit history or sufficient collateral.
- The approved amount is smaller than a secured business loan, which decreases the lender’s risk of not getting repaid.
Additionally, unsecured business loans usually come with enduring an extensive underwriting process before they are approved. Sometimes, this process can take thirty days or more to complete.
Overall, unsecured business loans are tools that perform with excellence for the small business that needs financing but does not have collateral. The proceeds provide the means to obtain materials for the business or to meet operating costs. As long as the applicant understands these and other benefits, as well as the potential issues, the loan can also be used in building business credit, protecting personal assets, and working toward a solid and reputable business reputation.