Things to Know Before Taking Unsecured Business Loans
Every business, big or small, needs funding at some point of time or the other. It might be to purchase new machinery, hire new labour, or meet short term emergencies. And unsecured business loans are quite helpful in this regard as they do not require any collateral. This implies less risk for the applicant as his assets cannot be sold off by the lender in case of a default. Naturally, this loan presents more risk to the lender, as he has no means of recovering the debt. All that the lender can do is exert pressure on the business to pay up. So, if you are wondering whether to apply for an unsecured loan or not, read on.
Pros of Unsecured Business Loans
• Shorter application process — The business loan application process requires careful evaluation of business papers, financial statements etc. on the lender’s part. After all, lenders want to be sure they are lending to a business that is financially viable and have potential. This is true for both secured and unsecured business loans. They want to ensure that the borrower will be able repay the amount in time. This process, however, becomes slightly more time-taking in case of secured loans when the loan is backed by collateral. This is because, the lender must evaluate the collateral being pledged to determine its value, which will then determine the loan amount to be offered to the borrower. This takes more time.
• Suitable for start-ups or small businesses that don’t have collateral — Often, start-ups and small businesses are not in a position to pledge any of their assets as security. In that case, it becomes difficult for them to get a loan for their business requirements. It’s for these businesses that unsecured loans can prove to be useful.
• No risk to your property or other assets — There is no risk to your property or other assets in case of unsecured business loans. Even if you default, at least your mind can be at peace, as your assets won’t be taken away. Secured loans pose a threat to assets because when you default, the lender has the right to use your property to recover the loan amount.
Cons of Unsecured Business Loans
• Higher rate of interest — Unsecured business loans pose a risk to the lender because in case of default, there is no way for them to recover the loan amount. Hence, they cover the risk by way of higher interest rates. Secured business loans are backed by collateral, and therefore, the rate of interest is slightly lower in this case. If you’re not concerned about paying higher rates of interest and you’re sure of your repayment capability, it’s best to go for unsecured loans.
• Other requirements are more stringent — Since unsecured business loans are not backed by collateral, lenders look more closely at other requirements, like credit score, business profitability etc. They want to be sure that they won’t lose their money. Unfortunately, new businesses, especially start-ups, which take time to make profits, can find it hard to apply for an unsecured loan.
• Loan amounts are smaller — In case of unsecured business loans, lenders are hesitant to approve large loan amounts because of the increased risk as compared to secured loans. Therefore, it’s a great option only if you need a small cash injection to tide over a difficult period, but unsuitable if you’re looking for long-term financing for a growth project.
All in all, whether you should go for secured or unsecured business loans depends on the situation and your business’s exact requirements. So, assess the situation very carefully and then decide.
