Unsecured business loans are a financing option that doesn’t require collateral, making it a great funding option for small businesses without high-value assets or prefer not to offer security. While this option seems excellent from the get-go, it’s still important to consider its pros and cons.
In this article, we’ll list the pros and cons to help you determine the right financing option for your business.
The Pros of Unsecured Business Loans
1. Quicker Loan Application Process
A typical loan application process from traditional lenders usually takes a few months to complete. Banks and other conventional financial institutions need assurance that the borrower can make payments on time and eventually repay the debt in full before approving their application.
With that said, they thoroughly examine every application for both secured and unsecured business loans. However, when borrowers submit collateral, lenders need to closely evaluate its value, prolonging the underwriting process. With access to unsecured working capital, lenders don’t have any collateral to evaluate. Lenders can immediately focus on other factors like time in business, credit score, and financial health.
In some cases, you can receive the funds from an unsecured loan within 24 to 48 hours from the application submission. This immediate processing is beneficial for business owners needing fast cash.
2. No Collateral Required
As mentioned, lenders don’t need collateral for unsecured business loans. Many businesses don’t own plenty of valuable assets, especially for startup companies and small businesses. Instead of collateral, lenders review other aspects, like business plans, market opportunities, and credit rating when qualifying a business.
You don’t have to worry about your assets getting repossessed if you fail to repay the loan. The lender would have to go to court to seize any property. In some cases, lenders are granted the right to repossess your property, but if the borrower has filed for bankruptcy, the court may discharge the loan.
3. Build Credit
Lenders approve a loan application because they trust that the borrower has the means to pay it back. The more you have to show – positive cash flow, good credit rating, etc. – the better your chances of qualifying.
Taking out an unsecured loan and making repayments on time can build your credit and trustworthiness in the eyes of lending companies. It’s a great place to start if you need financing and wants to improve your creditworthiness at the same time. Paying your dues on time shows that you’re responsible and financially stable enough to commit to loan repayments. This increases your chances of being able to borrow more working capital in the long run.
The Cons of Unsecured Business Loans
1. Harder to Qualify For
Unsecured business loans are harder to qualify for because without collateral, lenders are more focused on your credit scores, financial statements, business plans, cash flow, and other factors that lenders want to see. As much as possible, lenders want to minimize the risk they take on. If you have a low credit score, you’ll likely have a hard time qualifying for a loan.
If you own a startup or don’t have great credit, qualifying for an unsecured loan can also be challenging. If you do get approved, you’ll likely receive high-interest rates. The best thing to do is to apply for a different type of financing and build your credit so you can qualify for an unsecured loan in the future.
2. Higher Interest Rates
Lenders take on a considerable amount of risk when approving unsecured small business loans. For secured loans, lenders can simply recoup losses by repossessing the collateral. But this isn’t the case for unsecured business loans. As a result, lenders charge higher interest rates to offset the risk.
3. Lower Loan Amounts
Since unsecured loans are inherently risky, lending companies are often less willing to approve large amounts of money, so most unsecured loans come in small loan amounts. On the other hand, the collateral for secured loans protects the lender, so they’re more comfortable approving higher loan limits.
Unsecured business loans are a great resource for businesses that need a short-term cash injection. You can use the funds to pay for payroll software, utility costs, and day-to-day expenses. However, remember that you likely won’t be able to make major investments with an unsecured loan, like equipment purchases, expansion projects, and large inventory orders.
What’s Next? Apply for an Unsecured Loan Today
Small business owners who want to apply for a loan need to take a closer look at your current financial situation. In many cases, an unsecured loan makes the most sense, especially if you’re pressed for cash. However, if you want to qualify for the best terms and rates, lenders expect you to have a good credit rating, at least two years in business, and a positive cash flow. Before anything else, make sure to consider your business’ finances, needs, and preferences and base your decision around these factors.