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Pros and Cons of Unsecured Business Loans
Pros and Cons of Unsecured Business Loans

There are many instances where businesses use collateral for a loan. This collateral remains tied to the loan and if the business owner defaults in making repayment on time, the collateral is handed over to the lender. This means there is a high risk of losing your property when you choose a secured business loan. Unsecured business loans are an ideal alternative. The loan does not require any collateral and the risk is minimal. The loan has flexible repayment tenure and high amount. However, if you are not sure whether the loan is suitable for your needs, consider the pros and cons discussed below.

Pros of unsecured business loans

1. Quick application process: Since there is no collateral associated with the loan, there is no requirement for additional documents or valuation of the property, and this makes the entire process convenient and hassle free. When you apply for an unsecured business loan, you will notice that the process is quick and easy. You only need to make the loan application and submit relevant documents. There is no need to evaluate the collateral or offer extensive property documents as is the case in a secured loan. You will receive your funds in no time.

2. You can get a loan even when you do not own assets: Many businesses do not own enough assets to use them as a collateral and an unsecured business loan is ideal for them. There is no need for a collateral and the business will be valued on their books of accounts and on the potential to generate profit in the coming years. Several lenders need a collateral to offer a business loan. Hence, look for financial institutions that do not ask you for a collateral and will offer a business loan that is suitable for your needs.

Cons of unsecured business loans

1. High interest rate: Since the risk associated with the loan is high, the interest rate will also be high. Unsecured business loans are risky for lenders and the lender will charge a high interest rate to recoup losses in case of business failure and a failure to repay your loan in time. Because there is no collateral, there is no chance to auction the property and recover outstanding dues. A higher interest rate secures the loan.

2. High eligibility criteria: When there is no collateral associated with a loan, lenders will look closely at credit scores, income statement and balance sheet and at business plans. The goal of a lender is to reduce risk and you need to provide enough proof to show that you will be able to make the loan repayment on time. A business that has low credit score might not qualify for an unsecured business loan. If you have a fairly new business, you might not be able to qualify for the loan. Hence, you need to check the eligibility criteria online and then make an application.

There are both pros and cons of unsecured business loans, but they might actually be a good option. Any business that is interested in growing its reach or adding to their working capital should consider an unsecured loan. The loan application process is quick and hassle free, making it an ideal option for your needs. There is low risk for the borrower and the loan amount is based on your profile. Consider your business needs, understand the eligibility criteria and then make an application. You will have to ensure that the loan is repaid on time in order to build a strong credit score. The business loan will help take your business to its potential.

Pooja is affiliated with Hero FinCorp, a finance company, and writes on topics related to loans and small business financing.



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