Funding for a business is an especially common and widespread need.
For a company that’s just starting out, the old adage is true. You really do need to spend money to make money. A strong business plan can get you an operational business, but all of the associated costs need to be addressed along the way.
Companies that are growing, expanding, or diversifying also require funding to fuel that development. Seasonal businesses might need a loan to smooth out the ups and downs of cash flow until their busy time of year arrives again.
An unsecured business loan in Canada can be the right choice for many businesses. However, there are other options that might be more effective, too. Being informed about options for funding your business means you can make a more effective choice.
With that in mind, let’s look at what unsecured business loans are. Then, we’ll review their pros and cons.
Business Funding Options in Canada: Unsecured Business Loans
What is an unsecured business loan? Let’s break down the two key concepts named in this loan option.
A business loan is a very broad term for a debt-based funding arrangement, as Investopedia explains. As a business leader, you generally must explain how you will use the money. Some loans are restricted to certain types of purchasing and spending, such as improving technology, purchasing equipment, or acquiring real estate.
As a business owner, you’ll also have to demonstrate your company’s financial and operational stability to be seen as a good candidate for lending.
A traditional business loan provides a lump sum at the beginning of the arrangement. This gives your business power to make major changes and improvements beyond its own profits. Over time, the principal and interest are paid back until the debt is fully repaid.
A business loan can also refer to a business line of credit, asset financing, leasing, or a business consolidation loan (unsecured or secured), among other offerings. The term is very broad, covering many funding options.
An unsecured loan does not require collateral. That stands in contrast with secured loans, which use your assets as a kind of fallback repayment option. If you can’t repay the loan, the lender can gain possession of the collateral to address the debt.
From a business perspective, an unsecured loan sounds like a better option than a secured one. There’s no risk of losing specific business or personal assets. However, there are pros and cons to this option. Let’s take a closer look.
Pros & Cons of Unsecured Business Loans in Canada
Advantages of Unsecured Business Loans
Whether you’re considering an unsecured business loan for a start-up or for any other reason, these are some benefits to keep in mind:
- No collateral required. You don’t need to offer specific assets as a guarantee to your lender. Smaller and newer businesses simply may not have assets valuable enough to cover the total value of the loan. Even if there is no collateral present, typically the lender would require a general security agreement along with personal guarantees from the shareholders if the borrower is incorporated.
- A potentially easier path to receiving your loan. With unsecured business loans, there’s no need to identify suitable assets, determine their exact value, or receive approval from your lender. The process can move along more quickly than is otherwise possible. Businesses still need to qualify in terms of creditworthiness, however.
Potential Drawbacks of Unsecured Business Loans
What could make an option besides an unsecured business loan better for your business? Factors to consider with unsecured business loans in Canada include:
- Higher interest rates. Because unsecured loans don’t involve collateral, many lenders set higher interest rates than they would with a secured loan. This is a risk-management strategy for lenders. For borrowers, it means a higher total cost of taking out a loan.
- Smaller loan limits. Lenders generally focus on minimizing risk. Because no collateral is provided with an unsecured loan, lenders find other ways to manage that risk. Limiting the amount a business can borrow is one way to meet this goal.
- Shorter loan terms. Lenders are often less willing to offer longer loan terms because of the greater risk that an unsecured loan presents to them. Limiting the term of a loan is yet another risk-management strategy. As a borrower, it means higher monthly payments.
Despite these drawbacks, the advantages of unsecured business loans in Canada can be a potential option for existing or new business owners that don't have adequate collateral.
We can help you find the best type of loan for your business. You can count on expert guidance that puts a priority on your business’s unique needs.