There are different types of loans available for businesses. An unsecured business loan has proved to be the best option, thanks to the high loan amount and flexibility in repayment. The loan does not require any asset to be hypothecated and the entire risk remains on the lender. It is an ideal option for those businesses who do not own any asset or do not want to pledge one for the loan. However, before you apply for the loan, consider the pros and cons discussed below.
Pros of an unsecured business loan
1. No collateral needed: The biggest benefit of the loan is that the borrower does not need to provide any asset as collateral. This is in contrast to secured loans where lenders offer the funds only after considering the market value of the property pledged.
2. The loan amount is high: In case of a secured loan, the loan amount depends on the market value of the asset which is hypothecated with the lender. There is no such concern in an unsecured loan because the loan amount is not constrained by the value of an asset. The lender will consider the cash flow of your business and your credit score before disbursing the amount.
3. Quick turnaround time: An unsecured business loan will have a faster turnaround time. Lenders do not have to assess the market value of an asset and the application is processed immediately. The loan amount will be transferred to your account without any delay. The process of loan application is simple and straight forward, making it easier for you to get access to funds.
4. Build credit history: With regular payment of EMIs, you can build a strong credit history of the business and ensure that obtaining loans in the future is quick and easier. If you have no credit history, this loan is an ideal way of building credit.
5. Your assets remains safe with you: In a secured loan, there is a possibility of the lender taking possession of your property to recover the outstanding dues. Since there is no collateral hypothecated to the lender, there is also no possibility of the seizure of a property in an unsecured loan.
Cons of an unsecured business loan
1. High interest rate: The interest rate in case of an unsecured loan is slightly higher because of the fair amount of risk for the lenders. Since there is no asset to seize, the entire risk lies on the lender. The interest rate varies from one lender to another and also depends on your credit score.
2. Eligibility: An unsecured loan does not require you to provide assets but there is an eligibility criteria you need to fulfill. You need to understand the criteria before making an application. Some lenders require a specific annual income and you need to abide by the same.
There are very less cons of the loan as compared to the pros. However, you need to make a decision keeping your business needs in mind. Since the loan is unsecured, it does not mean that you walk away without paying what is due. The lender has a legal right on the funds and can take action. If you plan well, the loan can help you achieve your business goals and can also help build a strong credit score. You need to choose a reliable lender in the industry and compare the interest rates offered by them. Prepare a repayment schedule in order to ensure that the loan is repaid in due time. The funds can be used for any purpose in the business and will help your business grow