Apr 9, 2021
If you’ve been an entrepreneur for quite a while, you probably know how important financing is. For a majority of businesses, financing is the backbone of their business. Without enough working capital, you can cover any operational costs, pay your staff, or expand and do it without hesitation. For most start-up companies, they often go for fast unsecured business loans because they don’t possess many assets.
In most cases, such as in secured business loans, lenders will usually require their borrowers to present collateral for a loan. This will serve as the guarantee for the loan and can be seized when the borrower defaults on payments. The collateral will serve as the lender’s protection. In turn, borrowers can enjoy flexible terms and lower interest rates.
In the simplest term, taking out an unsecured loan means obtaining financing without presenting an asset as collateral. This can also be compared to invoice factoring for small businesses, another option for a business owner to expand his capital. Moreover, in order to qualify for Unsecured business loans, banks and other lenders look primarily at the creditworthiness of borrowers.
Many times, an applicant finds it difficult to qualify for these types of loans because they don’t possess a stellar credit rating or background. On top of that, borrowers also have to prove they have a steady stream of cash revenue.
Since lenders are facing a great deal of risk of letting their clients borrow a huge amount without security, the terms they offer will also reflect on the amount of risk. With unsecured business loans, you can expect high-interest rates, especially if your credit score is in the lower range.
While unsecured business loans can be a good option, entrepreneurs should also be cautious when it comes to these. Unsecured loans can come with higher interest rates because the banks and lenders are facing a larger degree of risk. If you’re planning to take out an unsecured business loan, be sure you know what you’re getting into. Doing this will ensure you won’t fall into a trap and put your business at risk.
A lot of entrepreneurs usually take out unsecured business loans mainly because of its convenience. But what are the other benefits of this type of loan? Are there downsides?
Here are the pros and cons of unsecured business loans.
The business loan application process tends to be long and complicated, especially if you’re requesting a large amount of cash. Banks and lenders can be really picky, and tend to evaluate the person’s qualifications carefully. If you’re applying for a secured loan, lenders will have to examine the collateral you present making the process even longer.
However, compared to secured loans, applying for unsecured business loans free a borrower from the responsibility of presenting a personal guarantee or collateral. Therefore, this step is eliminated and the process becomes shorter.
Since banks and other lending institutions are allowing you to borrow a significant amount without any personal guarantee, the only way you can prove that you’re financially responsible is through your credit rating. Ideally, you should have a credit score of 560 or higher to enjoy better terms and lower interest rates. So be sure to check your credit report before applying.
Unsecured business loans like equipment financing don’t require you to present collateral during the application process. Rather, the loan is based on the value of the equipment you purchase with the cash you received. This is especially advantageous to people who are still in the early stages of business and don’t have enough assets they can submit as collateral.
Since there’s an increased risk for the lenders, they will only be willing to loan smaller amounts to borrowers. Remember, there’s no security provided in this type of loan, so they’ll be on the losing side if a client fails to make payments. Due to this, unsecured business loans are only good for short-term business needs.
One great advantage of unsecured business loans is its flexibility. Aside from flexible loan amounts, many lenders also allow early repayments without any penalty.
If you’re looking for the best ways to fund your business and don’t have collateral to present to a bank or lending company, then unsecured fast business loans may be the ideal solution for you.
Businesses that need cash to purchase inventories, hire staff, manage payroll, or cover cash flow gaps can benefit most from this type of financing option.
But, if you need larger loan amounts for things such as a business expansion, then this may not be the best financing solution for you.
Nevertheless, unsecured business loans can furnish you with a lot of benefits when used the right way.