A Brief Guide to Unsecured Business Expansion Loans

Unsecured business expansion loans are provided to business owners who need to grow to accomodate their volume, but, cannot provide collateral. This is different from a secured loan where an asset, typically the business, is used as equity to fund the new loan. Unsecured business expansion loans offer the benefit of low risk to the borrower, but are expensive over the life of the loan.

Business Expansion Loans Need Consideration

A business expansion loan is only right if you believe your profit will increase as a direct result of the growth changes. For example, a computer chip manufacturer with a back log of over 100 chips is a good candidate for a business expansion loan. It is unnecessary to currently have the orders for more product, but you should have reason to believe that more work will be readily available after your expansion. If you are expanding to become a bigger competitor, you should reconsider. The same is true of expanding because you would like to manage more employees. Loans cannot stimulate your business in this way. You need market research showing you have a reasonable chance of capturing a greater profit after your loan. You will pay for your loan in interest rates; make sure this cost will be covered by new profit.

Consider a Secured Loan First

Once you determine an expansion is right for you,  consider a secured loan. Using collateral,such as your business equity, will save you money because of the lower interest rates. You will have lower monthly payments, giving your business a better chance to generate real revenues. You do not want to be in a position where all of your profits go straight to paying off the new loan. Before electing a secured business expansion loan, though, ensure you have enough in reserve to cover a financial emergency. Place several months profits on reserve. Your business may be liquidated in case of default, and the emergency fund will cover your loan payments if you have a bad month or quarter.

Consider an Unsecured Loan as a Last Option

Some businesses will not have the business assets as collateral, such as a fairly young business. Other business owners will not have enough of a reserve fund to risk mortgaging the business in order to secure an expansion loan. An unsecured business expansion loan should only be considered if other options are ruled out. The reason for this is simple: an unsecured loan will throw away your profits to sky-high interest rates. You are asking a lender to assume all the risk in case of default, and that lender will charge your business big time to do so. You are essentially taking a portion of your own salary, as well as potential bonuses or raises employees, and willingly giving it to a lender. Thinking in the long-term, an unsecured loan is not fiscally responsible.