Why take out an Unsecured Business Loan?
Taking out a business loan from the bank is often the best way to fund a business, but, in some cases, that is not an option. If your business is still in its infancy and you do not have many assets, a bank may be reluctant to lend to you and you will need to explore other avenues.
Unsecured business loans can be a great alternative for new businesses that do not have assets or do not want to risk their personal assets and would prefer to rely on the success of their business to repay their loans.
What Is An Unsecured Business Loan?
There are two main types of loans; secured and unsecured. A secured loan is backed by an asset, like your home, your car, or cash. If you are unable to pay back the loan for any reason, you can be forced to sell those assets in order to raise the money.
As the name suggests, an unsecured loan is a loan that is not backed by your assets. This may seem like the obvious choice because there is less risk on your part, but it isn’t that simple. As the lender does not have the same level of security that they would with a secured loan, they will charge a significantly higher interest rate. On the other hand, the process of taking out an unsecured loan is usually quicker with less paperwork, which is good for businesses that need cash fast.
How does an unsecured business loan work?
The length of the loan (term) is much shorter with unsecured loans. While you can get a secured loan for up to 5 years, most unsecured loans have a maximum term of 12 months. The interest rate on a secured loan is around 5%, compared with 15% + on unsecured loans. The loan amount is somewhere between $5,000 to $300,000 for an unsecured loan but if you are taking out a secured loan, it simply depends on what the lender will give you.
When taking out unsecured business loans, the process is quicker and can be done 100% online, and you often get an answer in a few days, if not the same day. Getting a secured loan requires a lot more paperwork and can take weeks to go through.
Unsecured business loans can be a good solution for new businesses that are struggling to find funding from other sources and need a fast cash injection. However, you do have to be prepared to make a trade-off in terms of interest rates and loan terms. If you have assets to put behind a secured loan and you are confident that you are able to make the repayments every month, this may be a better option for your business.