As the name suggests, the unsecured business loans are the ones, which have the advantage of flexibility without the need for security. In other words, the small business loans which are offered without requiring significant assets or security are known as unsecured business loans. There are usually two kinds of business loans that are offered by various banks or lenders, which can be termed as secured loans and unsecured loans. The secured business loans are the ones, which require significant checks and security by providing some of your valuable assets. However, unsecured loans are easier and faster to achieve, as they require lesser checks and security. But they have downsides also, as they are quick to attain and offered without any security, therefore they may require personal guarantees along with higher interest rates.
Difference Between A Secured Loan And Unsecured Loan
The most significant difference between a secured loan and an unsecured loan is that a secured loan is based on the security collateral or guarantee. This can be any of your valuable assets, such as a car, a house, or any property which the bank can keep as a security in case of any default. They take a significant amount to obtain as they required checks and formalities before their approval as they need to evaluate the value of your assets before issuing a loan. Moreover, the interest rates are lower in the case of secured loans.
While on the other hand, unsecured loans are much faster and easier to obtain as they do not require long formalities and evaluation of assets as there is no collateral or security involved. Therefore, if you are unable to pay back the loans, you are not going to lose any of your valuable assets such as a house or car. The only thing which is required is some personal guarantee along with your credit score and income statements during the application process. Moreover, as the lending party takes on higher risks with no physical assets as protection, you naturally have to pay higher interest in case of unsecured loans.
Requirements For Getting An Unsecured Business Loan
There are not as many requirements for getting an unsecured business loan as that of a secured loan. However, there are some requirements and formalities which are specific to the banks or direct lenders that are offering unsecured loans. They might need some personal guarantee in the shape of your credit cards or post-dated cheques to withdraw the amount on a specific date monthly from your account.
Examples Of Unsecured Loans
Even though unsecured loans have a higher interest rate than secured loans, they can still be lower than other solutions available for funds. Therefore there are several examples of unsecured loans, such as credit cards, including revolving credit loans, along with personal loans or student loans.
The above credit lines are usually considered as unsecured and include current debt and repayment plans. Thus, their interest rates are high. Moreover, in contrast to revolving credit, unsecured loans are the ones that pay off their loans in equal installments until the loan is fully paid off. So, small businesses and companies can use this type of loan to merge debt repayment.
Types Of Unsecured Business Loans
There are usually two categories that are usually available as unsecured business loans. They can be either direct lending solutions or peer-to-peer lenders.
1. Peer-to-peer Lenders
The peer-to-peer lenders usually rely on external investors for financing their loans. The borrowed money can even come from a variety of available sources, which can be individual investors from all around the world. They are generally more flexible in terms of approval and repayment than direct loans or banks. Still, they have a certain drawback of having higher interest rates than other options available.
2. Direct Lenders
The direct lenders usually lend you money from your funds, such as banks; the biggest difference is that they do not have some of the general requirements and limitations of banks. Therefore, although they offer good interest rates along with the advantage of approving loans faster than banks or peer-to-peer lenders.
Advantages Of Unsecured Loans
There are significant advantages and benefits which are associated with unsecured loans. Some of them are as follows:
- No Complex procedures
As the name suggests, they are offered without the need for complex procedures of evaluating assets and necessities of having security.
- Easier to attain
Secondly, they are easier and faster to obtain because of lesser checks and formalities.
- Protection of assets
This is also considered as a benefit related to unsecured loans as if due to any reason, you are unable to pay back the loan. So, your assets such as house, car, or property will not be taken by the lending source as the unsecured loans are free from collateral.
- Opportunity for small set-ups and Entrepreneurs
Thirdly they are beneficial for small businesses and entrepreneurs to set up their businesses with easier installment plans so that they can earn their livelihood without the need to have valuable assets.
Due to the flexibility, these loans are beneficial for several people, such as students, new business owners, or housewives who want to start their business.
Drawbacks/Risks Associated With Unsecured Loans
Along with the benefits, there are certain drawbacks or risks which are associated with the unsecured loans, which can be found as follows:
- Higher Interest rates
It is obvious with the unsecured loans that they are given without the requirement of security; therefore, they are subjected to higher interest rates as the lenders hold a higher risk in providing a significant amount of loan without any sort of valuable assets or physical security. Therefore, this risk or drawback is synonymous with unsecured business loans.
- Personal guarantees
Unsecured lenders usually need personal guarantees or a retention package, which are termed as blanket liens, to ensure that money can be recovered, in case your business suffers from failure or bankruptcy.
- Smaller repayment options
As the lenders usually view the unsecured loans riskier than secured loans, therefore they usually require repayment of loans in a shorter time frame, usually in the form of installments within no more than 36 months.
It can be concluded that with the significant amount of benefits and ease associated with the unsecured loans, such as the flexibility and quick transfer; they also bring risks, such as higher interest rates and smaller repayment time frame. So, it is essential to go for an unsecured loan, only when you assume that you can establish your returns within a specified period, whether through getting a successful business or through keeping your credit history clear and debt-free.