First, understand what is an Unsecured Loan.
An unsecured business loan is a financing without any personal or business asset as collateral. This type of loan require the borrower to show that they possess a good credit rating, with excellent financial history and cash flow. The lender takes more of the risk involved in granting the loan and therefore, demands a higher interest rate, which is common for business loan in Singapore.
Traditional lenders typically require business owners to pledge collateral, like real estate, in order to get approved for a business loan.
The lender is aware that the borrower might default and not be able to repay the loan. This risk attracts a large repayment amortization compared to a secured loan. The borrower must show positive cash flow, to support a regular monthly payment including interest is possible during the loan period and the amount of interest charged depends on the borrowing period.
Although the interest rates are higher for an unsecured loan, they can still be lower than other financing solutions. For example, a revolving credit loan, such as a credit card, personal loan from licensed moneylenders. These lines of credit are unsecured and involve a continual borrowing and payment plan, attracting a high rate of interest and inability for repayment.
DO Beware!
Alternative lenders for unsecured loans, charge the highest rates for their unsecured loans. Lenders often make the borrower take bigger risks by agreeing to automatic withdrawal from a current account.
With a secured loan, repossession of collateral helps the lender recoup the losses if there is payment default.
However, with an unsecured loan, usually there will be a personal guarantee made by a company director or owner. Often the lender will resort to debt collection, and in dire circumstances, the borrower will be placed in a bad situation.
Loan Rates
Unsecured business loan financing from alternative lenders typically costs more than traditional banks as the risk is higher. With a traditional loan from a bank, you can expect to pay 5% to 10% in interest every year, but with an unsecured loan, the interest rates can be double, or more, charging by per month basis.
Borrowers still favor unsecured business loans because they either don’t have collateral or don’t want to risk their personal assets.
Depending on the type of financing you are getting and the lender you work with, your terms and qualifications vary. However, you can expect that as loan terms get longer and loan amounts get larger, lenders will have higher minimum qualification requirements.
Personal Guarantees
Most unsecured lenders will need one or two personal guarantors. This means that in the event the business isn’t able to repay the loan, they will be held personally responsible for repaying it. Most lenders in Singapore, regardless of the type of loan you’re getting, will originate an unsecured loan without asking you to first sign a personal guarantee.
So are you ready for the challenge?