Business owners will often remember how hard it was for them to provide the required financing to establish their business. Funding is one of the most common hurdles faced early on by budding entrepreneurs.
Acquiring capital nowadays, though, is more simpler than ever. Almost everybody has access to funding, with the proliferation of lending companies thriving online and offline, as well as the range of government-issued loans available.
One very common approach used by business owners around the world is unsecured business loans. It can be difficult to get financing without collateral for your small business unless you get an unsecured business loan, but are the interest rates and risks worth it? This article shares everything you need to know.
What Is an Unsecured Business Loan?
An unsecured business loan is a financing option that needs no collateral of personal or business assets for approval. However, these loans require the borrower to prove they have a good credit record, alongside a strong financial history and cash flow estimates.
The bank or lender takes on more of the risk in issuing an unsecured loan, which typically means the loan will come with a higher interest rate. Because there is no collateral, the creditor is mindful that the borrower may default and will not repay the loan.
Typically, the borrowing period of an unsecured loan is shorter than a collateral-based or secured loan.
Advantages of Unsecured Business Loans
No Need For Collateral
Collateral is a type of security. Lenders will need some degree of security in order to justify the risk associated with lending money to you. Any valuable asset that you own, like equipment, a company car, or property can be collateral. Your lender can use the collateral to cover for any losses if you were to lapse on your loan.
However, not everyone has an asset available as collateral to offer. The advantage of an unsecured business loan is that it is not necessary for you to have collateral in order to be approved for the loan.
Quick and Easy Application
Applying for any loan can be a lengthy and stressful process. Lenders must be assured that you will be able to repay your loan on time and in full. This often requires a thorough evaluation, including the time it takes to assess collateral in the case of secured loans.
You will skip the long-winded procedure for an unsecured loan. Upon first meeting, the lenders will get to know you and your business and collect your data on the spot, simplifying the process.
Disadvantages of Unsecured Business Loans
Higher Interest Rates
Unsecured business loans may sound too good to be true on the surface, but with higher interest rates, you may think twice. Lenders have to justify the risk involved in accepting your application without collateral from a business perspective, which is why it is more costly to take on an unsecured loan.
A higher interest rate is something important to consider when thinking about getting an unsecured loan, but not finding funding may also come with a cost.
Smaller Loan Amounts and Terms
Normally, lenders are not able to approve big loans to businesses with no collateral. Doing so would boost the levels of risk too high for the lender.
This means that unsecured loans often some with smaller loan amounts and shorter loan term, which is not entirely a bad thing. For small businesses that need smaller cash injections, unsecured funding may be a great choice.
An unsecured business loan may aid you in achieving your business goals. During their growth phase, they can be ideally designed for small businesses, but they come with drawbacks.