When you want to start a business, it isn’t easy at first. You must arrange numerous things, including your finances. When you’re not financially loaded, it can be hard for you to secure funding from banks.
However, there are options that you can pursue, like unsecured business loans. This type of loan can help you start your business with some financial capital.
What is an unsecured business loan?
If you plan on starting a business but have little or no assets to begin with, to help secure a loan, then you can get an unsecured business loan. This is a type of loan that does not require any security.
Unsecured loans can also be an option for people who need quick financial support or prefer not to offer security.
Is it okay to take out an unsecured business loan?
You might be interested in unsecured financing, but you might be thinking about whether it may be a good idea to get it or not. Given below are some advantages that you can get from unsecured loans.
- The application process is shorter. When applying for a business loan, the whole process involves an intensive look at your assets and finances. This is because lenders need to be cautious and lend to people who can pay on time and fully repay their loans.
For unsecured business loans, the lender doesn’t need to thoroughly evaluate your finances and can focus more on other aspects like credit reports, monthly sales and time in business. Applications can sometimes be processed within 24 hours from the submission of the form. Hence, many entrepreneurs prefer this type of loan.
- You don’t need collateral. One problem new business owners face when applying for loans is their collateral. Unsecured loans do not require collateral and instead rely on other considerations like business plans and market opportunities.
Most startups can be eligible as long as they meet the requirements for unsecured financing. Since there is no need for collateral, the lender may require personal guarantees for the approval of your loan.
- There is no risk of losing collateral. When you take an unsecured business loan and cannot repay it, the lender would need to go to court to secure an order allowing them to seize your property. However, if you file for bankruptcy, the courts may discharge unsecured loans. Since you don’t need any collateral to secure this type of loan, there is no risk of losing the collateral if you’re unable to repay the loan.
Meanwhile, secured loans cannot be discharged by declaring bankruptcy, except in some cases. This is because the collateral used for the loan will be awarded to the lender.
Things to Be Aware of With Unsecured Financing
The advantages of unsecured business loans also come with some disadvantages.
- Unsecured financing has higher interest rates since they pose a higher risk for lenders. In the case of secured loans, the collateral is quickly seized when the debts are left unpaid. However, with unsecured loans, lenders need an alternative to ensure they are not left in the dark. Therefore, unsecured loans have higher interest rates.
- There are stricter criteria for you to qualify for an unsecured business loan. This is because lenders need to minimise the risk they are taking when entering into an unsecured loan transaction with you.
- In the case of unsecured financing, you wouldn’t be able to secure an amount as considerable as when you get a secured loan due to the increased risk associated with it.
When you need to start a business but do not possess the proper amount of assets or financials that secured loans require, then unsecured financing can be a viable option for you. Aside from its fast approval process, it also gives you a lower risk as there is no collateral required to begin with.