When you need funds to help your business grow, a number of business loans, including unsecured small business loans can help. In the most general terms, business loans can be secured with an asset or unsecured, meaning that there is no collateral. Understanding the ins and outs of each loan type can help you make the right funding decision for your business.
What Are Unsecured Small Business Loans?
Some loans are secured with collateral. This collateral is something of value that will be forfeited if the borrower is not able to pay back the loan. Collateral can include items like buildings, equipment, or future accounts receivable, which are all vital to the continued operation of a business. In some cases, personal property like houses are used as collateral.
With unsecured small business loans (find loans), there is no collateral put up. Because of this, the business owner is not risking the necessary property, equipment and funds that are needed to stay in operation.
Typically, qualifying for unsecured loan requires proof of business revenue and successful operation. Your personal credit history may also play a part in your chances of approval.
When you apply, your lender will assess how much risk is involved and make a loan offer based on what they find.
What Are the Benefits of an Unsecured Loan?
These loans are more likely to be approved than secured business loans i.e. collateral backed loans. As there is no collateral to evaluate, you are also likely to get the funding you need in a more timely manner.
An unsecured loan carries the added benefit that if you are unable to repay the loan or if you go out of business, the lender cannot claim any assets.
These loans also allow you more flexibility as a business. In a secured loan, you must hold onto any assets that are used as collateral. As an example, consider a business which has put up one of its warehouses as collateral. They later consolidate their goods and find that they need much less room. However, as long as the loan is in effect, they cannot sell the excess property that is costing money without providing benefit.
Are There Drawbacks to Unsecured Small Business Loans?
As with any business funding option, there are both possible pros and cons to consider. An unsecured business loan typically will have a higher interest rate than a comparable secured loan. This is because the lender is taking on a greater degree of risk than they would with a secured business loan.
When used carefully, unsecured small business loans can allow your business to launch new marketing campaigns, expand into new profit centers, and physically grow into new offices when the old ones no longer hold a growing staff. By putting these extra funds to good use, the short-term infusion of cash from a small business loan can help you make your business thrive.