An unsecured business loan can offer your business the advantage to fund new business opportunities, inventory purchases and improve cash flow. This type of business loan does not require that your business pledges collateral as a guarantee to secure the financing. Without a collateral guarantee, the lender assumes greater financial risk on the loan. This will result in less favorable terms and higher costs to your business as the borrower.
What Is An Unsecured Business Loan?
An unsecured business loan is simply a loan that is not backed by a valuable business asset such as equipment, vehicles, or real estate. Since there is no physical asset to seize in the event of non-payment, the lender is primarily at risk.
Advantages Of An Unsecured Business Loan
- Shorter Loan Application Process – When your business needs additional capital, time for the loan approval and disbursement of funds is usually an issue. Regardless of you business need, a lender will due their due diligence in the loan evaluation process to minimize their financial risk. The lender wants to ensure that they are lending to a business that will consistently make payments on the loan. With an unsecured business loan, the lender doesn’t have to evaluate the collateral asset (condition and fair market value) which can be time-consuming, and can instead focus on other factors, such as the your business’ credit history.
- No Collateral Guarantee Required – Many startups and small business do not have physical assets that can used as a collateral guarantee. Since an unsecured business loan does not have this requirement, a lender will review the business and owner credit history, marketing plans and financial history to qualify a business for a loan approval. Your small business has a means of access to a funding source without a collateral asset guarantee.
- Property Not At Risk – If your business is unable to repay the unsecured business loan (defaults on payment), the lender has limited recourse to recoup lost on the loan. While the lender may choose to secure a court order to seize any business property as compensation, this can be an expensive and time-consuming process. If your business chooses to file for bankruptcy, courts normally will discharge (wipe off) the unsecured loan debt remaining.
Disadvantages Of An Unsecured Business Loan
- Capital More Expense – Unsecured business loans are riskier for lenders since there is no collateral asset as guarantee. Without this guarantee to serve as a means to recoup any losses if your business does not pay back the loan (default) , the lender will have more stringent payment terms and charge a higher rate interest on the unsecured loan.
- More Difficult to Qualify – Without a collateral asset as guarantee, the lender will look to minimize risk by a more detailed evaluation of your business credit history, financial statements, commercial references, etc. If your business is ‘credit weak” you will struggle to get an unsecured loan approval.
- Smaller Loan Amount Approval – The lender will issue an unsecured loan amount based on their level of risk tolerance, not necessarily how much capital your business needs. The lender prefers smaller loan amounts to “measure” your business’ ability to consistently repay the loan. With greater history between you and the lender, the more likelihood that the loan amounts will progressively increase in size, allowing greater investment in your business.
If you are a startup or small business with no physical assets to use as a collateral guarantee, an unsecured business loan makes the most sense. It offers the advantages of a streamlined approval process with lower risks for your business. However, an unsecured business loan will normally have higher interest costs and more stringent payment terms. Consider all the aspects mentioned in this post, and only secure an unsecured business loan based based on what your business needs to accomplish your goals.
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