The growth of a business is majorly dependent on the continuous flow of finances that are required to purchase equipment, pay the workforce, fulfil orders, expand business operations and more. Large enterprises may somehow manage to get the funds, but obtaining funds without collateral for small companies is not easy. Therefore, to aid such businesses, financial institutions offer unsecured business loans. You might have started scratching your head, wondering what an unsecured loan is and how it is different from a secured business loan. If so, stop pondering and continue reading!
Secured Business Loans vs. Unsecured Business Loans
You must be aware that secured business loans are the loans provided by banks and other financial institutions when the borrower pledges his valuable assets like house, land, stock, etc., as collateral for the debt. If the borrower fails to repay the loan, the lender has the right to claim the asset.
In contrast, unsecured loans are the ones that do not involve collateral. However, if the borrower is unable to repay the loan, the lender can still claim the borrower’s assets. These loans are given based on the borrower’s credit history, allowing small business owners to get the required loans without pledging their considerable assets. However, since these loans have no collateral, there is a greater risk for the lender, and for this reason, the interest rates of unsecured loans are higher than secured loans, and they are harder to obtain. Just like secured loans, unsecured loans can be used for a variety of purposes that include:
- Cash flow boost
- Stock or asset purchase
- One-off costs
- Business growth
- Premises expenses
What if You Default on an Unsecured Business Loan?
Failing to repay an unsecured loan will have a negative impact on your credit score. If you take 30 days or more to repay the unsecured loans, it will lower your credit score and remain on your credit report for seven years. Moreover, if the lender takes legal action against you or puts your account into collections, this will also add up to your credit history.
Remember, civil judgements and collections will also appear on your credit report for seven years. There are only two ways to remove collections from your credit report– if it is valid, wait for seven years to get it off your record and if it is inaccurate, file a dispute with the collection agency.
Why Do People Prefer Unsecured Business Loans Over Secured Loans?
● Zero collateral
This is the first and foremost reason why people choose unsecured loans for their businesses. You do not need collateral for security when applying for this loan, and hence, it is an ideal choice for small and medium-sized enterprises.
● Offers flexibility
A collateral-free loan offers greater flexibility as they possess a unique Flexi loan feature enabling borrowers to get loans as per their requirements and repay them whenever they have enough cash flow.
● Quick loan disbursal
Since less paperwork is required for getting unsecured business loans, the application processing is quicker, and the cash is obtained faster. In contrast, it takes much longer to get the money when opting for secured loans as it requires verification of assets and their related papers.
● Very less documentation
The process of getting unsecured loans requires minimum paperwork. Less documentation makes it a hassle-free process.
● No restriction on usage
Unlike secured business loans, there is no restriction on the usage of unsecured loans. Once sanctioned, you can use the money as and when required, but it should be for business purposes only.
