A new business or expanding one can be a hassle-free task if you consider a third-party capital investment. The best option is a business loan, as banks or NBFCs do not demand ownership in business when they provide business loans. An unsecured business loan is one that is not backed by any collateral, thus preferred by many business individuals. In this article, we will talk about the pros and cons of an unsecured business loan.
What is an unsecured business loan?
In an unsecured business loans, lenders provide you money at their risks by keeping an account for your capital requirements and current income. These loans do not require the business to pledge collateral to the lender. There is a chance of high risk in these loans. A credit score can play a crucial role in obtaining unsecured credit from lenders.
But there are advantages and disadvantages to both unsecured business loans. Have a look at these before applying for the loan.
Pros of unsecured business loans:
- Collateral is not needed: In drawing an unsecured loan, you need not
present any asset as collateral. Thus, in the situation of a default, you need
not lose your business or personal asset as a whole.
- Helps in building credit history: Paying the unsecured loan on time helps build
credit history and makes future loans easily accessible. A credit score is
critical for your business to become eligible for future loans.
- Assets of your business are safe: The most significant benefit of taking an
unsecured business loan is the safety of your assets. Lenders can not do
seizure of properties in case there is no collateral.
- Shorter and faster loan application process: There are very few business loan requirements
in the application process of taking an unsecured business loan. The loan can
be released within a week or less. It turns to be a lifesaver in case of
urgency or emergency revival plans.
- No constraints on loan amount based on asset value: The amount sanctioned by lenders largely depends on the credit score in case of an unsecured business loan, and it can be helpful if the asset values are not large enough.
Cons of unsecured business loans:
- Strict eligibility criteria: Unsecured business loans have strict
eligibility criteria and do not lend money to people having a low credit score.
They would ask for the loan and even check your financial status.
- Small loan amount: Lenders lend a lesser amount of loans to
reduce risks from defaults significantly.
- The borrower takes the liability of loan: You are not free to default and walk away
without making due payments of your loans. The lender may drag you to court and
might force you to pay the money.
- Very high-interest rates: Though you get to have easy access and fast
sanction of loan, you would need to pay dues at high-interest rates. An
unsecured business loan EMI calculator can help you get a rough estimate. The
reason for the high-interest rate is to cover the damage from defaulters.
- Short tenure duration: To increase the chances of loan repayment, lenders give a tighter loan repayment schedule, and it becomes tough to make them agree to an extension in repayment term conditions.
Getting an unsecured business loan comes with its own advantages and disadvantages. You need not issue collateral but might have to face strict business loan requirements. You need to pay your dues off in short tenure according to monthly or yearly basis. It is good to apply for an unsecured business loan in case you are stable financially and can pay off high-interest rates. It can help you save your personal or business assets in case of default.