What is an Unsecured Loan and How Can it Help Your Startup?

Startup

Running a business isn’t an easy feat but operating a startup can prove even harder. Startup owners face many setbacks and challenges on their road to entrepreneurial success, particularly when it comes to cash flow.
Thankfully, there are some funding options when it comes to boosting your startup, namely in the form of unsecured business loans. Unsecured loans are easier to attain than more traditional types of business financing, which is why we’ll be discussing them further today.

Firstly, What is an Unsecured Loan?

To begin, lets look at what an unsecured business loan is. Unlike a secured loan, an unsecured loan does not require collateral (a valuable asset, such as property you own, used to secure the loan). Instead, a lender may require a personal guarantee from the directors of the business as confirmation that the loan will be repaid.
Unsecured loans are usually offered by alternative lenders, that is, a lender that isn’t a bank or traditional financial institution. They are often on a short-term basis (i.e. from 3 – 12 months) and pose many benefits to startup businesses.

Why Should a Startup Choose an Unsecured Loan Over Other Types of Funding?

There are a number of reasons why an unsecured business loan may be more suited to a startup business. These include:

Lower risk
Because an unsecured loan doesn’t require you to use a valuable asset to secure the loan, the lender cannot seek repayment by going after your assets. If things turn sour, this could mean the difference between losing the roof over your head, or not. Keep in mind that anyone who isn’t in a position to successfully repay a business loan shouldn’t be applying for one in the first place (nor are they likely to be approved).

Easier to qualify for
Unsecured loans are quite lenient in their pre-requisites when compared to other types of loans. Generally, you’ll just need to have been running your business for a minimum of 6 months (which is beneficial for startups) and have a minimum monthly or annual turnover. Keep in mind that every lender is different, so be sure to check their individual requirements before you apply.

Fast application and approval processes
Other business loan types, such as secured or long-term loans, can be quite difficult to apply for, particularly when they’re being sought through a traditional lender, such as a bank. Not only are there stricter pre-requisites, but the entire application and approval process could take weeks.
Unsecured business loans, on the other hand, can be applied for within just minutes online, with many applicants receiving a decision within just 24 hours. You could even have your approved funds as early as the next business day.

How Can an Unsecured Business Loan Help Your Startup?

If you’re considering an unsecured business loan for your startup, then you may be wondering how one can specifically assist your venture. We’ve outlined these below:

Increasing working capital to cover day-to-day expenses
Every business may struggle with daily expenses at some time or another, but startups are especially vulnerable. Without sufficient working capital, it’s unlikely that your startup will ever get off the ground.

Purchasing equipment or machinery
To offer your products or services to customers, you may need specific equipment or machinery. These can be expensive, however, but the funds received from an unsecured business loan can help you to make the purchase without affecting your bottom line.

Leasing a workspace
Many startups begin in their founder’s home or garage, so there will (hopefully) come a time when you’ll have to upgrade to a larger workspace. Renting or purchasing a space can be costly, but an unsecured business loan can assist.

Buying inventory or stock
Without inventory, it’s unlikely that you can meet your client’s demands, nor can you grow your startup. With your approved funds, you can buy the required amount of stock to make a mark on your industry.

Hiring employees
You can only get so far on your own, even with a startup. For your new venture to thrive and grow, you’ll need to hire help in the form of employees. Ensure you can afford to pay their wages by obtaining an unsecured business loan.

Inventing or creating a new product
This is likely the backbone of your entire startup: a new idea for a service or product that doesn’t exist at the moment. If you qualify for an unsecured loan, then it can also be used to help you tweak your existing product or service, or even to invent an additional one.

Now that you know what an unsecured business loan is, along with how it can help your startup, we hope this knowledge will allow you to make a more informed decision regarding new business finance. Best of luck on your entrepreneurial journey!

Melanie Doncas is a content writer for Lumi, an Australian fintech specialising in small business loans. She is passionate about helping SMEs, entrepreneurs, and startups to grow their business.

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