Every business needs an external cash injection at some point in time. This could be in the form of a traditional term loan, unsecured business funding or any other kind of loan.
In some instances, a business may use collateral in order to obtain a loan. If the business defaults on loan repayment, the lender confiscates the collateral.
On the contrary, an unsecured business loan does not require collateral, which means that it poses a lower level of risk to the borrower.
The pros and cons of securing an unsecured debt are discussed in the article below:
Pros of unsecured debt
No Requirement of Collateral
There are many businesses that do not possess something of value that can be used as collateral rendering them ineligible to secure financing.
Unsecured loans do not require you to put up collateral of value. Rather, they will be content with your future projections, and business plans. If the lender deems them good enough, he will approve your loan.
When you are not putting up collateral, the lender may ask for some other kind of surety like a personal guarantee.
Business loan applications take quite a lot of time to get approved because the lender is following an SOP that requires it to review each and every aspect of the business. It applies to both secured and unsecured financing.
However, in case of a secured loan, the lender must spend additional time in surveying the collateral and obtaining its value. On the contrary, when you are seeking an unsecured loan, you will save this time.
No-Risk Posed to Your Assets
For a secured loan, you are required to put up specific assets. It could be the office building or your production equipment. In case of default, the lender will take control of this asset.
There is no such condition with an unsecured loan and they pose no threat to your assets.
Cons of unsecured debt
Higher Rate of Interest
An unsecured business loan is riskier from the point of view of the lender because he does not have an asset as a backup if you fail to repay the loan.
In order to cover this higher risk, the lender may charge more interest from you.
Not Easy to Qualify
When there is no collateral involved in the transaction, the lender may scrutinize your business more thoroughly. It would review your financial statements, tax returns, credit score, and projections. If the lender is able to find a gap in any of these areas, it is most likely to decline your application.
The Final Word
A business in need of working capital in the form of an unsecured loan must take stock of its present financial condition.
In many cases, an unsecured loan will look the most suitable option because of many reasons, some of which are listed above.
However, it is up to the business owner to analyze what is best for his business in the long run, and then act accordingly.
To read more on topics like this, check out the finance category.