What are Unsecured Loans?
Unless you’re in the loan business, you might not know what an unsecured loan is or how it differs from a secured loan. Well, we’re here to help. Here’s what you need to know about unsecured business loans.
Defining Unsecured Loans
If you’re searching for an unsecured loan for your business, you’re looking for a bank or lender who will issue the loan based on your creditworthiness rather than how much you can offer in collateral. In other words, an unsecured business loan can be obtained without you putting your property on the line in the event you default. Getting unsecured loans can be hard if your credit history isn’t impeccable. You need a pretty high credit rating to qualify for one of these loans.
Comparing Unsecured vs. Secured Business Loans
On the flip side, a secured loan is supported with collateral–property and other assets–that can be sold by your lender if you default. Putting down collateral on a loan is your way of reducing some of the risk assumed by the lender. That’s why you typically need a better rating to obtain unsecured loans.
The Pros and Cons of Unsecured Loans
There are pros and cons associated with any type of loan. Unsecured small business loans are usually easier to get. This is because you don’t have to supply the lender with collateral. A lender can seize your collateral if you break the terms of a secured loan contract. However, in order for a lender to seize your property with an unsecured loan, the financial institution would have to get a court order. Unsecured loans can also be discharged if your business ends up filing for bankruptcy. This is not usually the case with secured loans.
Of course, there are some disadvantages to consider as well. Because you don’t supply collateral with an unsecured loan, the loan is a riskier proposition for a lender. That means that you’ll end up paying more in interest, and higher interest rates can really add up over the life of a loan. Higher interest rates also mean bigger monthly payments. You might find it difficult to qualify for the amount you want if payments are higher than you anticipated. And if you’re credit history is poor or you’re just starting out and haven’t really established a credit history yet, your loan application might not be approved at all.
Tips for Qualifying
If you’re in the market for an unsecured loan, there are steps you can take to make your application more appealing to a lender.
First, take care to build a solid, positive credit history. For any type of loan, a lender will examine your credit report and check for evidence that you pay your bills on time and aren’t delinquent on any other loans.
You should also work to building strong revenues and profits. The stronger these are, the better for your loan application.
Remember that defaulting on an unsecured loan, like defaulting on any loan, is a major problem that can negatively impact the credit rating of your business. Don’t take on loans unless you’re sure it will be a benefit you and your business.
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