Pros and Cons of Unsecured Business Loans
Of the different categories of loans that can be drawn by companies, an unsecured loan can often prove to be the best option, thanks to the flexibility and quick turnaround time it offers. In this article, we will look at the pros and cons of unsecured loans.
Pros of Unsecured Loans:
1) No collateral required.
Drawing an unsecured loan does not require the borrower to present some personal, or business asset as collateral. This is in contrast to secured loans, where lenders disburse the loan only after assessing the property being presented as collateral — and can repossess the property in case you default on your payments.
2) Amount of loan not constrained by the value of an asset.
The amount being disbursed as secured loan usually depends on the property or asset being presented by the borrower as collateral. The loan amount is generally around 60 to 70 percent of the market value of the asset — as assessed by the lender. Unsecured loans are not constrained by such conditions, and the amount sanctioned by the lender depends purely on your credit score and the cash flow of your business.
3) Faster turnaround time.
Unsecured loans have a much faster turnaround time. Since lenders don’t need to assess the value of a physical asset, the application can be completed and processed online. The loan can be released to your account as soon as a week after you first put in your application. Some fintech companies like Loan Frame have further streamlined the loan assessment process and can disburse the loan within 3 business days. This makes unsecured loans a lifesaver when you need an urgent infusion of cash to prop up your business.
4) Builds up your credit history.
If you manage to successfully pay off all the instalments of your unsecured loan, it will help build a credit history for your business and make the process of obtaining future loans easier.
5) Your business assets are safe.
Lenders often turn to the seizure of business properties in case the borrower is unable to repay a secured loan. Since there is no collateral hypothecated to the lender, there is no possibility of seizure of a property.
Cons of Unsecured Loans
1) Higher rates of Interest.
Unsecured loans represent a fair amount of risk for lenders, since they don’t have any collateral to seize in case of a default, Lenders usually charge a significantly higher rate of interest for unsecured loans to offset the risk, as compared to a secured loan. The rate of interest depends on your credit score.
2) Smaller loan amount.
In absence of a collateral which poses a higher risk for the lender, most lenders usually are comfortable disbursing smaller amounts as compared to a secured loan. Loan Frame has come up with an unsecured business loan offering where loan amounts are much higher than what traditional banks offer at interest rates starting at 18% per annum.
3) Shorter Tenures.
To minimize the risk exposure, the lenders allow a tighter re-payment schedule for the borrowers to adhere to. For the same reason, it is also very hard to get the lender to agree to a repayment term extension.
An unsecured loan does not mean that you can simply walk away without repaying what is due. Lenders can still drag you to court if you default on your payments, and the legal mechanisms could then force you to come up with the money.
5) Loan eligibility
Unsecured loans do not require you to put your personal assets at stake. This comes with trade-offs in the form of rigid requirements you must fulfill, in order to be considered eligible for an unsecured business loan.
For example, this would mean a higher credit score requirement. Moreover, the terms including the rate of interest could be tough as compared to a secured loan.
Conclusively, unsecured loans can be the best, or the worst choice for you — depending on several variables including your financial condition, credit score, the purpose of the loan, and so on. As such, it may be a good idea to sit down and discuss your requirements with someone well versed in the field, before you go on and file an application for the loan.