Unsecured Business Loan – What are the Pros and Cons?

Why Unsecured Business Loan Is A Better Option For Small BusinessesBusiness loans serve to fulfil myriad financing needs of businesses, be it for expansion, placing inventory orders, managing operational expenditures or hiring new staff. And business loans can be of two types – secured business loans and unsecured business loans.

The difference between secured and unsecured loans

Secured business loans, as the name suggests, are backed by collateral. Unsecured business loans, on the other hand, are those that do not require any asset as security. They are less of a risk to the borrower but more of a risk to the lender. Therefore, lenders often charge higher rates of interest on unsecured loans. So, should you go for unsecured business loans or not? To help you out, this blog explores both pros and cons of such loans.

Pros of unsecured business loans

Shorter Application Process – Since there no assets or collateral involved, the documentation is relatively simple. Hence, the approval process is a lot faster than secured loans. This is because secured loans require documents pertaining to the collateral to be submitted. These are then verified and vetted for valuation before the loan amount can be decided.

Easy Access to Funds – Thanks to unsecured business loans, every business can now get financing to grow. Earlier, many businesses could not get access to funds because they did not have any assets to pledge as collateral. That is not the case now. Even start-ups who do not have any asset or reserve can get a loan.

No-Risk to Property – Most entrepreneurs pledge a piece of land or real estate as collateral, if they apply for a secured loan. However, if the owner defaults, the lender will have all the rights to seize his assets and sell the same to recover the loan amount. So, in that case, the business owner will not be left with anything.

Cons of unsecured business loans

Higher rates of interest – Since unsecured business loans involve a greater risk for the lender, they usually come with higher rates of interest. So, you may find yourself paying larger EMIs, which might affect your finances in the long run.

High credit scores – Since unsecured loans do not require any collateral, lenders want to be doubly sure about the borrower’s repaying capacity. Hence, the eligibility criteria might be strict on other fronts like credit scores, credit history etc. The lender might also look very closely at bank statements, financials, cash flow etc. So, if you own a start-up but do not have a strong credit score, you are unlikely to get an unsecured business loan.

Smaller loan amounts – Unsecured loan amounts are usually smaller than secured loan amounts. That is because in case of secured loans, the amount is directly linked to the collateral. Unsecured business loans are risky for lenders, and therefore, they are unwilling to sanction larger amounts.

To conclude, both secured and unsecured business loans have their advantages and disadvantages. So, what you choose will depend on your exact requirements. If you have a short term requirement like cash injection or inventory purchase, an unsecured business loan is a great option because you can pay it off faster and become debt-free. On the other hand, for long term requirements like investment or business expansion, a secured business loan is a better option because the rates of interest are lower and the monthly EMI will not hurt your budget.

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