Numerous startups and small firms pursue Mini-Business Loans to fund their additional financial needs. Even profitable ventures often require a cash booster to place inventory orders, expand operations, pay rent for real estate, meet maintenance charges, pay salaries, etc. Sometimes, enterprise owners will use some collateral to avail of a Business Loan. This collateral is pledged against the term loan, so if there is any default on this secured loan, the lender can recover the loan amount with the help of the collateral. Therefore, the collateral is protection for lenders against non-repayment of Business Loans.
However, an unsecured Business Loan is also a smart option for business owners that don’t require any collateral. It is offered purely based on the creditworthiness of the business owners assessed via income, CIBIL score, financial documents, etc. Although unsecured Business Loan interest rates are on the higher side when compared to secured loans due to no collateral, they have their advantages. Let’s discuss 4 pros and 4cons of availing of an unsecured Business Loan.
Pros of an unsecured Business Loan
1. Shorter Loan Application Process
Lenders will certainly vet each Business Loan application regardless of whether it is a secured or unsecured Business Loan. But, with an unsecured Business Loan, the lender focuses on factors like business credit report, business experience, monthly sales, etc. This aspect allows the application processing to be shorter, which often results in faster approval leading to the loan disbursal after 24 hours post application submission. Many businesses usually need urgent financing and hence consider unsecured Business Loans as the best bet.
2. Collateral is not required
Many businesses don’t possess any collateral. A startup especially may not have any business assets to provide lenders as collateral. Hence, this would make the startup not eligible for any type of secured Business Loan. However, with unsecured Business Loans, there’s no need for collateral. Instead, other considerations like sales, credit history, business plans, market opportunities, etc., are reviewed for approving an unsecured Business Loan.
3. There is no risk of losing collateral
A Secured Business Loan is protected with the help of specific assets. Ex: if you take out a mortgage on your office, it will act as collateral. If you default due to any circumstances, the lender will have the right to control the property as it was pledged as collateral. But, with an unsecured Business Loan, the lender needs to seek the court’s help to get an order to seize any assets. Sometimes, a lender can take the property to recover the losses on the loan. However, courts may discharge the unsecured Business Loans if the business owner applies for bankruptcy.
4. Build Credit history
Unsecured Business Loans are among the best ways to build credit history as lenders will look at it before any approval. You may need funds for expansion or taking care of sudden cash needs. The lender can get second thoughts if you don’t have any credit history. Hence, taking an unsecured Business Loan can help you build a credit history, and prompt repayments will improve your credit score.
Cons of an unsecured Business Loan
1. Higher Interest Rates
Unsecured Business Loans are a lot riskier for lenders in terms of recovery. With secure Business Loans, the lender has apparent leverage to recover their losses if you cannot repay them since they can seize the collateral. However, with an unsecured Business Loan, there’s no collateral required and hence no leverage. As a result, unsecured Business Loan interest rates are higher than secured loans, which will reduce the risks for lenders and recover most of the loan amount.
2. Hard to qualify
As there is no collateral needed in Unsecured Business Loans, lenders usually look closely at specific indicators related to your business, such as:
- Your business CIBIL score
- Annual generated revenue
- Financial statements
- Business plans
- Cash flow projections
The lender’s intention is simple: reduce risk to a maximum extent. Due to this, a business owner with a low business personal credit score will struggle to qualify for an unsecured Business Loan.
3. Loan Amounts are relatively lesser
Due to the increased risk, most lenders are less than willing to approve hefty loan amounts; hence the unsecured Business Loan amount is relatively less compared to that of secured loans. The collateral assures recovery to the business lender; thus, they are more comfortable offering secured loans in bigger amounts.
4. Tenure is shorter
For an unsecured Business Loan, the maximum repayment period is usually around 5 years, which is short when compared to a secured one, which offers more than ten years of the repayment term. However, lenders generally persist with shorter tenure in case of unsecured Business Loans to reduce the risk involved.
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