A small business loan is additional finance that is lent to businesses that they can use to achieve goals, realise projects and manage cash-flow. Most loans are either unsecured or secured, although within these two categories there are many different variations and types.
Unsecured business loans are ideal for many small businesses as they do not require personal collateral. These loans are based solely on the financial strength of the business, requiring solid risk analysis and underwriting processes. Many modern fintech lenders use technology as an enabler for that, creating time to focus on high quality service. The advantage of an unsecured loan is that business owners don’t risk losing personal collateral, which in many cases is already given away for bank loans. Unsecured loans are therefore an ideal way to top up an existing loan for which personal collateral has already been provided.
Secured business loans are based on the business’ assets such as property and equipment, or the business’ cash flow. This structure has a protective purpose for the lender, as it secures a certain type of income from the borrower, should the borrower not be able to pay back the loan. Personal or corporate guarantees are also a common way of securing a loan, in which the borrower is fully or partly responsible for backing the loan in whatever way possible. Application processes for secured loans tend to be longer, as assets need to be evaluated, and they tend to have more stringent requirements.