Advantages of Unsecured Business Loans
Unsecured business loans are financial aids extended to business owners without the need for collateral. For owners of small businesses, applying for a loan is part of the life cycle of a business. Small business loans can help jump-start a new business or boost the competitiveness of a growing one.
One of the most popular loans in the business industry is the unsecured loan. Here are some of the advantages of an unsecured business loan:
- There is no need to put your asset on the line
This is probably the top reason why small business owners opt for unsecured loans. This is beneficial because the lender has no right to get your asset in case you default payment.
- There is a higher probability of getting approved quickly
Since unsecured loans do not involve collateral, there could be fast approval. Compared to a secured loan which takes 3-4 weeks of processing, unsecured loans may take about 48-72 hrs.
- The process is easier compared to other types of loans
Unsecured loans require less paperwork because there is no need to submit supporting documents for the collateral. You may need to process only important documents like proof of identification and proof of address. The application may also require you to submit supporting documents about your business like your annual revenue and business plan. Other required documents vary depending on the lender.
- The use of funds depends on your business needs
With an unsecured loan, there are no restrictions as to how the funds must be used. Compared to secured business loans, unsecured loans can be used for any purpose. Secured loans are usually taken out for a specific purpose only.The only restriction of usage of funds for unsecured loans involves illegal activities. Such illegal activities include gambling or buying securities. The funds you get from an unsecured loan can be used for advertising and merchandise purchasing. For existing businesses, it can be used for expansion or payment of tax.
- This can be granted even to those who have poor credit scores
Credit scores are usually taken into consideration before the approval of the loan. For unsecured loans, however, the credit score is sometimes overridden. Most lenders are flexible on this aspect. They tend to consider other factors like the number of years in business and annual revenue.
- You may be granted a higher loan amount
In most instances, the loan amount for unsecured loans can be higher. In comparison, the amount in a secured loan is dependent on the value of the collateral. For an unsecured loan, there is no asset to base the amount. Lenders for an unsecured loan can extend funds of between $2,500 and $1M.
- This type of loan may be discharged in bankruptcy
For loans that are secured by an asset or property, the remaining payable loan remains despite a declaration of bankruptcy. This is not the case in unsecured loans. Once the business declares bankruptcy, the remaining loan is dissolved with it.
Unsecured business loans offer attractive advantages that can help your business. When opting for this kind of loan, be sure to compare different lenders. Choose the offer that aces on terms and conditions.
Disadvantages of Unsecured Business Loans
While there are many advantages in opting for an unsecured loan, it also has disadvantages. Here are some disadvantages of an unsecured business loan:
- Higher interest rates
Unsecured loans have high interest rates. First, unsecured loans are processed faster. This means that you are paying for the convenience from the fast processing of unsecured loans. Second, unsecured loans do not need collateral. This means that lenders are more at risk of default payments. Thus, you are paying for the risk that lenders may encounter during the loan term.
- Short terms
Unsecured loans are short-term loans. This is to lower the risks that lenders may incur in case of non-payment or bankruptcy. Compared to a secured loan, default on the part of the borrower can place a lien on the property. This cannot be done in unsecured loans. This is why the loan terms are shorter. Protection should be granted to both borrower and lender, as both have their own interests to protect.
- Stricter payment terms
Secured business loans have fixed monthly payments. An unsecured loan, on the other hand, may require more frequent repayment terms. This is also implemented by some lenders to reduce the risks involved in granting unsecured loans.
- No tax benefits
While the interest for secured loans may be tax deductible, this does not apply to unsecured loans. For an unsecured loan, you are going to deduct it from your tax.
- It requires personal guarantees
When a small business owner applies for a loan, he may be asked to sign a personal guarantee as well. This means that even if the loan is not supported by collateral, you may still need to pay for the loan in case your business gets dissolved. With a personal guarantee, the lender is given the capability to pursue your personal asset in case the loan goes south.
- It has a more stringent qualification requirements.
In some cases, it is harder to qualify for an unsecured loan. The rationale behind this is quite simple. No security means a higher risk for lenders. This is the reason why most of them set higher standards of qualification. Some may look at both your personal and business credit history. For those who do not have credit history or have a poor credit rating, it may be harder to get a loan. Other lenders may look into your credit card sales or sales via PayPal and Amazon. A strong revenue based on these factors may qualify you for an unsecured loan.
These disadvantages should not stop you from pursuing unsecured business loans. Rather, it should give you the encouragement to boost your business. When getting an unsecured loan, you should weigh the advantages and disadvantages.
Am I Ready for an Unsecured Business Loan?
There are three main factors that you need to consider to know whether or not you are ready for unsecured business loans.
First: Be ready with your credit report. While some lenders do not look into this, it is wise to have it on hand. In most cases, business owners with excellent credit rating have higher chances of qualifying for an unsecured loan. Credit scores say a lot about how you handle money, credit and payments. It reflects your integrity and trustworthiness. For other lenders, they see credit rating as a form of security.
Second: Be ready with your business plan or business progress report. For start-ups, support your business plan with a 5-year projection. This can help lenders have an idea of where their money will be invested in. For existing businesses, prepare the previous years of financial reports. This will show how well your business is doing. These reports serve as guarantee that you are capable of supporting a loan.
Third: Be ready to get rejected. Approaching a lender with all your documents on hand does not guarantee you a loan. Lenders, by way of protecting themselves, evaluate your application and may end up saying “no” to you. This does not mean that it is over for you. Get up and look for another lender!
The requirements of lenders vary. They may all offer unsecured business loans, but not all of them follow the same standard. You have to accept the result of your application. Remember to keep your options open. When one lender closes his door, another lender will open his window!