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All about Unsecured Guarantor Business Loans

Mar 6th 2020 at 12:43 AM

 

If you do not have a solid credit history, your financing options are limited. However, this does not mean that there are no interesting alternatives. Unsecured small business loans offer a route for borrowers with a limited or poor credit history. Due to the structure of these business loans, even a borrower without credit history or assets can be approved. However, you need a good friend, partner or family member to get the loan.

First of all: what is an unsecured loan?

To understand this type of financing, we need to explain what an unsecured loan is. Every existing loan is guaranteed or unsecured. A secured loan is a loan that requires collateral that can be almost anything. Generally, expensive goods, vehicles and other things are used as security. If the borrower cannot make payments with a secured loan, the lender can become the owner of the collateral. This protects the lender because even though the borrower cannot pay, the lender has something of value. An unsecured loan is the opposite. There is no security for unsecured business loans. The lender has no legal rights to your assets. However, they can still collect your account and take you to court to recover the debt. Since there is no security to "guarantee" an unsecured loan, there are several risks to the lender. All they have to rely on is your credit history. Therefore, unsecured loans are generally more expensive. Since unsecured loans also take into account your credit history, lenders are less likely to approve a borrower with a bad credit history. However, a guarantor may change this. What does the guarantor mean? A guarantor is someone who supports a borrower and agrees to be financially responsible in case of non-payment. This person can be a partner, friend or family member with a strong credit history and financial stability. They must be at least 21 years old. In addition, your company or others' business can be considered a guarantor.

In essence, the guarantor agrees to be held liable if the borrower does not pay. For the lender, this reduces the risk of lending to a borrower with bad credit. As a result, the lender will not charge higher rates to offset the primary borrower's risk profile.

A guarantor can also help someone with low wages, low assets or otherwise financially unstable. While credit history is a key factor in getting an unsecured loan, wages and assets are also important.

It should also be noted that a guarantor does not have to be involved in the term of the loan. They often terminate their commitment after a predetermined period. Of course, this is described in detail in the loan agreement.

 

All in all: what is an unsecured guarantee loan?

In essence, an unsecured guarantee loan is simply an unsecured loan covered by a guarantor. In other words, it is a loan that:

1. Not Guaranteed.

2. Is guaranteed by someone with a strong credit history and financial stability.

Any loan that meets these two constraints is an unsecured guarantor loan. However, this doesn’t mean all unsecured guarantor business loans are the same. Depending on the specific loan product you’re looking at, there will be significant differences.

For example, not all guarantees are the same. If one guarantor could guarantee the entire loan, the other could only guarantee part of the loan. Assuming that everything else is the same, a partially guaranteed unsecured loan is more risky than when fully secured.

For this reason, the partially guaranteed loan will usually be more expensive because the lender has to compensate for the extra risk.

It is important to note that having a co-signer does not make it a guarantee loan. The co-signatories have other financial rights and responsibilities than those of the guarantors.

eg. Is the guarantor financially responsible only when the lender has exhausted all collection methods against the principal borrower. Conversely, a co-signer is treated as another borrower in case of non-payment.

Similarly, if the loan is secured by collateral, it is not an unsecured guarantee loan. Instead, it would be considered a secured loan.

Consumer demographic considerations

Whether an unsecured guarantee loan is right for you depends on the type of consumer you are. Generally, these loans are intended for anyone who will be denied traditional financing.

For example, people with bad credit usually have an unsecured guarantee loan. These may also be borrowers looking for payday loans or similar short-term financing options.

However, searching for an unsecured warranty does not necessarily mean that you are financially unstable.

For example, it is possible that immigrants and young people have not had the opportunity to build their credit history. Although they may save and have a solid income, it is difficult for them to get traditional financing approved. In this way, a guarantee fund opens up funding that would otherwise not be available to some borrowers.

For someone who can be approved for traditional financing, unsecured business loans make no sense. After all, that person is probably approved for an unsecured loan with comparable (or better) interest rates and larger loan amounts.

In addition, they do not have to face the potential complications of identifying a guarantor. As you can see, these loans are for consumer specific demographics.

 

Benefits of unsecured business loans

1. Less stringent requirements

To be eligible for most unsecured loans, you need a solid credit rating. Without one, you are unlikely to be approved. However, one of the key benefits of unsecured loans is that people with a limited credit history or poor score may still be eligible. Assuming you have a high credit rating guarantor, your credit history will not be too important to the lender.

1. Competitive prices As mentioned, reducing the risk to the lender by having a secured loan. The total cost of the loan falls. Compared to other financing options for borrowers with bad credit, unsecured loans will be price competitive.

2. Larger loan amounts The relatively low risk profile of a guaranteed loan helps borrowers qualify for larger loan amounts. So even if you qualify for a less unsecured loan, you can add even more unlocked financing.

3. No warranty required Instead of relying on collateral, the lender's credit rating is proof that the loan will be repaid. If you do not have assets to get a loan or do not want to risk it, this can be advantageous.

Potential Downsides of Unsecured Guarantor Loans

1. Potential negative effects on your relationship with the guarantor

When someone guarantees you a loan, your financial situation is closely linked. If problems arise and you are unable to pay, this can cause considerable stress.

2. Risks to the Guarantor

Being a guarantor involves significant financial risks. If the borrower does not repay the loan, the guarantor must make the difference. In addition, the default value is also displayed on the guarantor's credit report, which will affect its credit rating.

3. The borrower must release private data

If you find a guarantor, be open with them about your payment options. Depending on the guarantor, he may see your personal financial information to confirm this information.

For many borrowers, releasing this type of private information can be uncomfortable.

4. Interest rates can be high

These business loans are cheaper than some financing options available to low-credit borrowers. However, this does not mean that they are cheaper than traditional financing options, such as a secured business loan.

Alternatives to financing

These loans are generally best suited for borrowers whose credit history is not ideal. Therefore, if you are looking for this type of loan, assume that all alternatives should also be forgiving with regard to credit score.

With that in mind, your financing options include:

1. Advances to traders

A trade advance (MCA) is not a loan. Instead, you sell part of your future credit card sales in return for an initial amount. For this reason, a low credit rating does not prevent you from being qualified.

2. Invoice invoicing

With factoring, you sell your invoices at a reduced price in exchange for a package. Again, your credit value is not considered important because the factoring company will evaluate the value of your invoices.

3. Financing equipment

Credit scores depend on whether or not the equipment is approved for financing. However, the rating required is generally lower than with traditional financing. Of course, you can only use this funding for commercial equipment.

Final thoughts

Financially secured loans are an attractive option if your credit is not perfect. However, there are non-economic factors to consider. If you are unable to pay, your guarantor may be held legally liable, which could have a significant impact on your relationship with him.

Even if you pay off your loan on time, the scheme can add stress to your relationship with your guarantor.

This does not mean that this loan is not right for you. It just means that you and your guarantor must be aware of the risks and discuss them.

 

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