Unsecured loan

Here are three scenarios where you might look at taking out an unsecured business loan:

• You’re looking to borrow, but you don’t have much in terms of tangible assets (e.g. you rent an office rather than owning commercial property)
• You do have some valuable assets but you don’t want to borrow more than your assets are worth
• You’d prefer not to offer specific assets as security

You might want to consider an unsecured loan if you want to borrow more than the value of your assets, if you would prefer not to offer security, or if you’re a fast-growing business that needs finance quickly.

On the plus side, unsecured business loans are usually simpler and quicker to arrange than secured loans because there is no need for the lender to inspect or value any assets.

However, in the absence of any security, the lender cares much more about your business’s profile – and may also look at your personal credit history and personal assets. After all, they will need assurance that you can repay the loan if things don’t go to plan. Unsecured lending is usually more expensive than secured lending because there’s more risk for the lender.

For an unsecured loan, the lender may look at:

• Revenue and profit (vs. loan amount)
• Bank statements
• Filed accounts
• Trading history
• Payment history (e.g. late payments, court judgments)
• Directors’ histories (lenders may ask for a personal guarantee)
• Forecasts and business plans
• Your clients/customers

Unsecured lending for SMEs may be an attractive option, especially for smaller amounts, as it is straightforward and provides quick access to funding.

The flexibility of repayment periods, which can be up to five years, allows smaller businesses to respond quickly to cash-flow or liquidity problems. As you are already trading, the lender will assess against your business prospects.

However, for larger amounts (over ₦500,000), the rates offered on an unsecured loan may be uncompetitive as they reflect the higher risk taken by the lender. You may find short to medium-term loans at lower rates.

An unsecured loan is ideal for the SME that needs to borrow money without providing security. If you are just starting up or don’t have any assets to use as collateral, raising capital can be tricky. A business loan that is not secured may be the optimal option for your business.

Unsecured lending is a broad term. As well as short-term loans and ‘term’ loans (i.e., medium-term and long-term loans), it includes, for example, merchant cash advances, revolving credit lines, overdrafts, and credit cards.

You might also want to consider the different types of working capital finance.