The choice between secured loans and unsecured business loans, presents to the entrepreneur, the opportunity to make smart decisions based on his situation.
Whether you are thinking of starting a new business or expanding one, unsecured business loans would be a wise choice to consider. As we all agree, funding is one of the most critical drivers for any business to thrive. Luckily for entrepreneurs, the year 2016 comes with healthy competition between traditional banks and online financial institutions. This encounter means alternative finance could make lending rates lower than in earlier years.
As entrepreneurs and startup businesses emerge, demand for loans is also at its peak. Small business finance has never been more accessible with establishing institutions like Kabbage, RapidAdvance, Accion, and many other non-traditional financial institutions. Loan rates for small business have declined considerably as non-traditional banks become engaged with startup projects in providing business capital. These third-party financial businesses offer secured loans and unsecured business loan options.
Annual estimation at the end of 2015 shows that average national loan rates in the United States on unsecured business loans were much higher compared to rates on secured business loans. Because unsecured business loans do not anticipate collateral backing, high rates occur in such transaction.
What is an unsecured business loan?
One of the fast business loan alternatives is the unsecured business loan. The unsecured business loan option is funding given and supported by the borrower’s creditworthiness rather than any collateral or property.
Borrowers should generally have very high credit ratings to be approved a line of credit. They are also called signature loans or personal loans. Acquiring a credit card is a good example. Unsecured business loans do not require collateral, which suggests lenders take risks in granting them. Therefore, interest rates, in some cases, could be high. As the sole proprietor of a business, an unsecured business loan is an easy option to consider. In other cases, the interest rates on unsecured business loans have a fixed APR.
When to consider unsecured business loans
If you have recently been planning to start a new business or have an idea to expand an already existing business, then considering the third-party loan could be a good idea for you.
Working capital loans backed by collateral have increased the rate of startup projects and have improved business expansions. Unsecured loans continue to strengthen business finance solutions. It has become an alternative for business startup loans for entrepreneurs who do not have collateral in obtaining funding for their businesses. Business ideas should always be kept alive! Funding them without collateral is also great but has its negatives and positives.
Advantages of Unsecured Business Loans
For the most part, obtaining unsecured business loans is more straightforward than others, as it does not need collateral security.
Lenders can’t seize any of your business property.
If you have acquired an unsecured business loan, but the business is not going as planned, you could file for bankruptcy. The court most likely will relieve you from paying back the loan.
Disadvantages of Unsecured Business Loans
Unsecured business loans have higher interest rates than secured loans.
It is challenging to acquire an unsecured business loan if you don’t have good credit.
If your business startup relies on unsecured business loans for funding, any default could affect your business's credit ratings. It is, therefore, imperative to keep track of payments as a positive way to improve your creditworthiness.
Enoch Antwi is the managing editor at The Business Frontal. He worked as a business and an environmental journalist in the late 1990s with the Business and Financial Times. His passion is to provide on-demand valuable information and insights on business, entrepreneurship, leadership, innovative technologies, and principles for corporate success in today's business world.