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  • April 1 2020

Unsecured Business Loans: Are They Worth It?

Unsecured Business Loans: Are They Worth It?

Unsecured business loans represent a special funding solution that doesn’t require personal or business assets as collateral. Those who wish to contract such loans need to have an excellent financial history, good credit rating, and a forecast for good cash flow. The interest rate will also be higher since the financial company takes a higher risk when handing out this loan.

How do unsecured business loans work?

The lender knows that the borrower may draw out on the loan since there are no strings attached. Hence, this is the reason why the repayment amortization is higher compared to a secured business loan.

Those willing to contract such loans will need to show a detailed analysis of the cash flow, which forecasts that monthly repayments for the loan plus interest rate are possible for the entire period of the loan. These loans are usually given out for shorter periods. In addition, the interest rate varies based on the chosen period.

Types of Unsecured Loans

A credit card, a student loan, or a personal loan are all types of unsecured loans since they require no collateral deposits and guarantees from the borrower. However, they come with a higher rate of interest.

When it comes to unsecured business loans, borrowers must know that they need to be repaid in equal installments until all the sum + interest has been fully covered.

Who can benefit from Unsecured Business Loans?

These loans are usually contracted by businesses that are in debt and need to rise back on track again. There have been situations where businesses that were on a bad track managed to rise up and even turned into multi-million dollar companies after a series of successful transactions. However, they require intelligent investments and a solid business plan.
Financial companies are looking for this solid business plan when an unsecured loan is requested since they need to be as sure as possible that they will recover their money. If the credit rating criterion is not met, then the lender may request directors or company owners to sign personal guarantees. There have been many cases when business owners contracted unsecured business loans, failed to get their business back on the right track, and ended up having to file bankruptcy.

Pros of Unsecured Loans:

  • They require no collateral assets such as vehicles, houses, commercial properties, etc.
  • The process is usually faster compared to secured business loans

 

Cons of Unsecured Loans:

  • Interest rates will be higher compared to secured loans
  • If the credit history is not very good, then these loans will come with a high debt load and may even require personal guarantees

In conclusion, these loans have to be used as a last resort by business owners who currently struggle with their businesses yet have good credit ratings.
However, as professionals, we don’t recommend anyone getting unsecured business loans. They are highly risky and they can become a problem especially for those who are facing a financial rut. Though they are easier to get and even if you have a good credit history, the guarantee of paying off your loans in a short time is much lower. Get in contact with us to find better ways of securing a business loan at lesser risks.

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