Small business loans are an extremely common solution to the financial speed bumps that come along with owning a business. It doesn’t matter what kind of business you own, how long you’ve been open, or what kind of profit you turn. It’s likely that at some point, procuring a loan will be advantageous for your business, even if it’s just to build credit.
If you have something to offer as collateral, you can of course look into the potential of a secured loan, but that is not always the case for every business owner. Even if it is the case, perhaps what you have to offer is not something that you’re willing to risk. After all, any loan comes with a certain level of risk, so it’s extremely important to know where to draw the line. If you come to the conclusion that the risk isn’t worth it, it may be a good idea to redirect your attention to the other side, unsecured loans.
Unsecured business loans don’t require any form of collateral, so there is a lot less risk to take in going into it. However as with every option in life, there are pluses and minuses to go along with each side. There are many forms of common unsecured loans such as student loans or personal loans, but in this article, we are going to dive into the details of unsecured business loans.
What Are The Virtues And Vices That Come With A Business Loan?
Whenever you make the commitment to get into a financial agreement, it’s imperative to take into account every single detail before you take the leap, especially when there are so many options out there to be considered. Although there are significant benefits that come along with an unsecured loan, there are also some cons, as with any loan, that need to be taken into consideration.
The Benefits of Unsecured Loans
1. The Application Process Takes Less Time
The business loan process can be somewhat intense, regardless of the type of loan that you are trying to apply for. It’s understandable of course. Lenders are always going to want to take a look at their potential business partners to make sure that they are trustworthy, reliable, and apt to pay their bills in a timely manner. That is the case regardless of whether you are searching for a loan, a business line of credit, or any other similar line.
The difference in this case, is that when you submit an item as collateral, there is a whole different process that they have to follow through with. They have to verify the value of any collateral offered, and regardless of what the collateral is, that is going to take some extra time.
In the case of an unsecured loan, the lender doesn’t have to focus on any collateral, so their focus is directed more towards items such as credit and income. This speeds up the process significantly.
A lot of unsecured loans can turn over their application process within 24 hours. A lot of times when a business needs money, they don’t have much time to be waiting around for approval. When this is the case and time is of the essence, it’s best to look into an unsecured loan.
2. Collateral Isn’t A Requirement
For a lot of businesses, collateral simply isn’t an option. In the case of a newer business such as a startup, it’s entirely likely that the business won’t have anything of value to offer, which would eliminate the possibility of secured loans entirely.
This allows the lender to move their focus to different facets of the business. This is not just about credit score. They also go to take into account business plans, market potential, and many other factors. This means that you have a better chance to impact your outcome if you put in the time to chart your story and present it properly.
If your business doesn’t have anything significant to offer for collateral, or you truly believe that you have an amazing opportunity that will show on paper, then unsecured business loans may be the right option.
3. There Is No Risk That You Will End Up Losing Your Collateral
Whatever it is that you end up offering as collateral, it’s going to be important to your business. Whether it be equipment or realty, it is likely a vital piece in the operations of your business. If you do end up having trouble with your loan, then the lender will take control of that collateral.
With an unsecured loan, you immediately lessen your risk because they have no legal right to any of your property. As a result, if it did come to that, they would have to go through the courts to get any form of compensation. Even then, there is the potential that the courts will discharge the loan in the case that the owner ends up filing for bankruptcy.
The Drawbacks Of Unsecured Loans
1. Your Interest Rate Is Going To Be Higher
Unfortunately, this just comes with the territory of reduced risk. The lender has no clear path to repayment with an unsecured loan, and as a result they are going to want to hedge their bet through the interest rate.
If the cost of the higher interest rate is going to have a noticeable effect on your business, unfortunately the only way to mitigate that is through collateral. In such a case, it is likely a better decision to consider a secured loan.
2. It’s More Difficult To Qualify For An Unsecured Loan
There are a lot more factors to be considered when it comes to an unsecured business loan, and as a result there are a lot more places that your qualification can slip through the cracks.
It’s not just your credit score and your revenue. The lenders are going to take a look at your business plans, and your cash flow projections. Neither of these are solid numbers, and if the lender doesn’t find them satisfactory, you may not be able to qualify.
Unfortunately, if you have poor credit score, and no collateral, you may need to aim for a different avenue such as a business line of credit. Otherwise you might have to wait until you’re in better standing.
3. The Amount You Will Get Will Likely Be Smaller
Because of the higher risk factor to the lender, not only are they less likely to accept your application, but they are also less likely to give you the amount that you’re looking for. They may give you an offer, but it might not be nearly what you are looking for.
As a result, they make a great source of financing for shorter term needs, but for larger investments, it’s likely that you will need some form of collateral. These projects include things like expansion, equipment, and large inventory hauls.
Unsecured Business Loans Could Be The Answer
Depending on what it is that you’re looking for, unsecured loans could be exactly what you need for your business. Due to the quick turnaround and easy process, these loans are ideal for a lot of business needs, especially if they are pressing.
Whatever your situation, if you are considering a loan, make sure that you look into your situation carefully, and reach out if you have any questions.