Understanding the Pros and Cons of an Unsecured Business Loan

Many businesses require financial support. Even if a company is profitable, there can be a need for financial assistance. That is when loans are helpful. Loans are required by businesses for expansion, making real estate payments, and investing in supplies. 

Business owners take a secured loan. These loans are taken against collateral. Such collaterals remain tied to that business loan. If the business owner cannot pay, i.e., he becomes a defaulter, they need to hand over the particular collateral to the lender. 

An unsecured business loan is another option that businesses have. This type of loan does not require collateral. There are many unsecured loans, e.g., student loans and personal loans. Here, we will discuss the best unsecured business loans. 

What Are the Pros and Cons of an Unsecured Business Loan?

If you are applying for an unsecured business loan, you should know its pros and cons. At the end of the day, it is a loan, and it is best to research all its features in detail. 

This will make it easier for a person to decide whether or not they want to go for an unsecured business loan.

Below is a list of the pros and cons of an unsecured business loan.

Pros:

• Short and Simple Application Process: 

The application process for a business loan can be pretty extensive. Lenders want to ensure they have accurate information about the borrower. They do not want a defaulter. Hence, lenders carefully check every single piece of information. It is the same for both unsecured and secured loans, and also for other types of loans. 

When it is a secured loan, collateral must be provided, and the lender must thoroughly check the collateral. It is essential to determine the actual cost of the object. The entire process can be pretty time-consuming. 

In an unsecured business loan, this time is saved. The lender gets ample time to check other factors such as the borrower’s monthly salary, credit score, and time spent in business. 

Since the time needed to process unsecured loans is comparatively less, the amount gets disbursed quickly. At the time, money gets transferred to the person’s account within 24 hours of applying. Most businesses prefer a business loan that is processed quickly.

• No Need for Collateral:

The biggest problem with providing collateral is that many small businesses don’t have one. If it is a small startup, then they will not have any collateral that they can offer against the loan. This makes the business ineligible for any secured loans. 

But when you opt for an unsecured business loan, there is no need for collateral. Many other considerations get reviewed instead, i.e., market opportunity and business plan. 

Hence, small startups and other businesses with no collateral mostly opt for unsecured loans. Since they usually qualify for unsecured loans, small businesses are advised to go for the best unsecured business loans. 

There is a need for a personal guarantee to approve an unsecured business loan. Since no collateral is provided, the lender needs some legal assurance to be able to give the loan. This means that if a person cannot repay, then the lender will have all the legal rights to pursue the personal guarantor of the borrower. 

• No Risk of Losing Collateral:

For a secured loan, there is a need for a mortgage. For instance, if a person has borrowed a mortgage loan by keeping their office property as collateral, in the event of a default, the lender would have all legal control over the property. It is so because the particular property has been kept as collateral. 

In the case of an unsecured business loan, the lenders can go to court to get an order to seize the property of the loan defaulter. This property can be used to recoup any loss in the loan value. But the court might discharge this loan if the business owner files for bankruptcy. 

But a secured loan is mainly discharged by something other than bankruptcy or other means. Most of the time, the collateral is awarded to the lender. 

Cons:

• Higher Rates of Interest:

For lenders, an unsecured business loan is quite risky. In the event of a default, lenders have minimal chances of recouping their losses. Since recovery is difficult, the lender charges a higher interest rate. If a person is unwilling to pay the higher rate, they should opt for other business loans. 

• Difficult Qualification Process:

Without any collateral, lenders look at other factors in your business. These factors include:

• The credit score of your business
• Annual revenue.
• Financial statements.
• Business plans. 
• Cash flow projections.

Lenders try to minimize their risk at all costs. Hence, the qualification criteria for an unsecured business loan are lengthy and very specific.

• Lower Loan Value:

Due to the risks involved, many lenders only approve a small sum of money. To get the maximum amount, one must perform due diligence to find the best unsecured business loan. 

If you are looking for a short-term investment, an unsecured business loan is the best option. However, unsecured loans will not be able to finance large investments such as:

• Purchasing equipment
• Expansion project
• Placing huge inventory orders

Conclusion

Before you apply for a business loan, be well aware of your financial situation. An unsecured business loan has lower risk and can be processed quickly. But one must be thorough research before opting for anything if one wants the best unsecured business loan. If you are looking for an affordable business loan, then Piramal Finance is a good financing option for buyers.