Finance is the lifeblood of a business—a term that everyone is familiar with yet challenging to achieve. Every company goes through a phase where finance becomes an issue, and the management will not be able to approve and release the fund/budget for new projects and business expansion. This phase is ubiquitous for companies, and what they do to get out of this difficult situation is apply for a loan. However, getting loans is not easy, especially if your business is still nascent. So, the only option that the entrepreneurs have are the unsecured business loans.
Unsecured loans are the last resort for entrepreneurs who got rejections from central/state banks. Some entrepreneurs go for unsecured loans without approaching the banks for secured loans. You may be wondering why these business people prefer unsecured loans over secured loans? Your doubts will be cleared soon as you read the rest of the article. You’ll understand the meaning of secured and unsecured loans, the advantage of unsecured loans, and other benefits.
What is an unsecured loan?
Collaterals are not necessary for unsecured business loans. Normally when people take a loan from a financial institution, there is a rule to place something as collateral for the loan—a car or house is the common collateral people come up with. But, there’s no need for collateral in unsecured loans. When applying for an unsecured loan, all you need is a decent credit score.
Some examples of unsecured loans are:
Student loans- several financial institutions offer loans to students without any collateral and less interest. Most of the schemes are based on the government’s directives or the bank’s scheme. The banks give a break of a few years (course time) for the students before they can start paying the loan back.
Credit cards- the credit card is a great way to gain a credit score and can apply for loans. But, the credit card itself provides an unsecured business loan.
Personal loan- you can apply for this loan by showing your salary/income(s) to the bank as proof that you are capable of paying the loan back.
The reason why people opt for this type of loan is because of two reasons:
- It’s easier to get loan approval and
- There are three significant advantages of this loan
The advantages of unsecured loans are:
- No need to leverage any of your secure funds or assets.
- The approval rate is high, and the time taken for approval is the least in comparison.
- You can borrow smaller amounts with this type of loan.
Why do people prefer unsecured loans over secured ones?
Sure there are several benefits of unsecured loans, as you read in the points mentioned above. But, what makes entrepreneurs avoid secured loans are the disadvantages that come with them.
Disadvantages of secured loans:
- Possibility of losing your collateral (if you delay or default in payment)
- Secured loans have restrictions such as the minimum balance on the bank account, use of collateral, and lack of flexibility about the usage of money loaned.
- The process of approving the loan may lag or delay because of the paperwork and analysis of the collateral value.
These are the reasons why entrepreneurs prefer unsecured loans over secured ones. If you need to take a loan for your business next time, you know which one to apply for.
Alison Lurie is a farmer of words in the field of creativity. She is an experienced independent content writer with a demonstrated history of working in the writing and editing industry. She is a multi-niche content chef who loves cooking new things.