Pros and Cons of Unsecured Business Loans
In some cases, businesses will use collateral to secure a loan. This collateral is tied to the loan, so if the business defaults on this secured loan, it must hand over the collateral. However, unsecured loans are also an option, and aren’t tied to any collateral.
In this post, we’ll explain the pros and cons of unsecured business loans, so that you can determine if it’s the right product for you!
Pros of Unsecured Business Loans
Shorter Application Process
The business loan application process can be intensive. Lenders want to ensure that they’re lending to businesses that can make their payments. As such, they thoroughly vet every application. This is true for both secured and unsecured business loans.
When collateral is being offered, however, the lender must examine the collateral closely to determine its value. This can become time-consuming. With an unsecured business loan, the lender doesn’t have to evaluate collateral, and can instead focus on other factors, such as the business’s credit history.
This streamlined application process often results in funds being distributed faster. Many businesses seeking financing need financing sooner rather than later, so unsecured business loans are often a better option.
Collateral Isn’t a Requirement
Many businesses lack collateral. A startup, for example, may not have any valuable assets to offer lenders as collateral. This would make the startup ineligible for most secured business financing.
However, with unsecured business loans, collateral is isn’t a requirement. Instead, other considerations, such as business plans and market opportunities, are reviewed when qualifying a business. In many cases, startups and businesses lacking collateral can still meet the eligibility requirements for an unsecured business loan. Due to this, you should pursue unsecured options first if you fall into either category.
Property Won’t Be Risked
A secured business loan is protected with specific assets. For example, you might take out a mortgage on an office that is secured by the property itself. If you default, the lender would be able to take control of the property since it was submitted as collateral.
With an unsecured business loan, the lender would have to go to court to secure an order to seize any property. In some cases, a lender may be authorized to seize property to recoup loss on a loan. However, if the business were to file for bankruptcy, courts may discharge the unsecured loan.
On the other hand, secured loans are rarely discharged through bankruptcy or any other means. The collateral tied to the loan is usually awarded to the lender.
Cons of an Unsecured Business Loan
Higher Risks for Lenders Produces Higher Interest Rates
Unsecured business loans are riskier for lenders. With a secured business loan, the lender has a clear path to recouping losses if your business fails to repay them. The lender can simply seize the collateral. With an unsecured business loan, there is no collateral. As a result, lenders will typically charge a higher interest rate on unsecured loans.
They Are Harder to Qualify For
Without collateral, lenders often look much more closely at business credit scores, financial statements, business plans, and other aspects of the application. The lender’s goal is simple: minimize risk. Due to this, a business with a low credit score will struggle to qualify for an unsecured business loan.
Lending Amounts Are Often Smaller
Because of the increased risk, lenders are often less willing to approve large amounts of money, so many unsecured loans come in small amounts. These loans can be a great resource if you need a small cash injection, but you won’t be able to make major investments.
Conclusion: Find the Loan Right for Your Situation
Any business interested in additional financing first needs to examine its current situation. In many cases, an unsecured business loan will make the most sense, because of the streamlined approval process and lower risks. However, in some cases, a secured business loan will better serve the needs of the business. Consider your business’s needs, and make your decision based on this!
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.