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The Advantages and Disadvantages of an Unsecured Business Loan

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Starting a new business or expanding an existing one requires plenty of backup regarding skill and finances. One of the most popular ways to gain financial control is to approach third-party lenders for a business loan. If this is something you have been thinking about, here are some things you will need to know. Firstly, there are two types of business loans, namely secured and unsecured. The difference is simply – Secured loans are backed up by collateral, like property, while unsecured loans are not. Both have its advantages and disadvantages, but for the sake of this article, we will be covering those of an unsecured business loans.

About Unsecured Business Loans

Lenders who offer unsecured loans won’t ask your business to put up any collateral to be granted the loan. That being said, you will still have to meet fairly strict income and credit requirements. Unsecured business loans usually range from £5 000 up to £500 000, depending on the lender, the size of the business and its credit score.

Advantages

The best thing about unsecured business loans is that you do not have to supply collateral. While lenders can seize ownership of collateral should you default on your payments with a secured loan, a lender can’t take any property if you default on your unsecured business loan unless he is court ordered to do so. Another advantage is that, should you find yourself in the unfortunate position of filing for bankruptcy, the court may discharge unsecured loans, which they typically will not do for secured ones.

Disadvantages

Unsecured loans are generally riskier for lenders, so they usually involve higher interest rates than secured options. This means that your business will pay more over the life of the loan than it would have on a secured loan of the same amount. This added interest rates will also add to the individual loan repayments, making them more difficult to afford if you are already on a tight budget. Finally, unsecured loans are harder to get as it is generally considered a riskier option for lenders. The requirements are often more stringent than that of secured loans, and the lender may not approve your application if your business has a poor credit history.

What you need to consider before applying for an unsecured business loan

Remember, defaulting on any type of loan, whether unsecured or not, will affect your credit rating. Just because there is no risk of you losing your collateral, does not mean you won’t face the repercussions of defaulting on your repayments. Some courts may dissolve an unsecured loan in the case of bankruptcy; it won’t discharge it if the lender has already obtained a judgement against you. Taking out any type of loan, whether unsecured or not, if a big decision and borrowers should look into all their options before choosing the best on to suit their own needs and that of the business.

 

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