Capital is a veritable necessity when running a small business. Many entrepreneurs will work hard over several weeks or more to develop a solid, well-researched business plan. The business plan will generally outline all projected needs for capital for the first few months or more of operations. However, over time, you may find that additional capital is needed for various purposes. Some will need capital for basic operations. Others need capital to invest in new equipment or vehicles, to cover slow accounts receivable accounts, to expand the business in various ways and more. An unsecured loan is a great option to consider when you need small business financing. A closer look may reveal why this may be the funding source you want to turn to.
What Is an Unsecured Loan?
An unsecured loan is in direct contrast to a secured loan, which may be your other primary financing option as a small business owner. With an unsecured loan, you will not use collateral when applying for your loan. With a secured loan, on the other hand, you will either pledge existing assets as collateral or use assets that you are purchasing with the loan as collateral. Both options have their pros and cons, and greater insight into these pros and cons can help you to make an educating financing decision that will benefit your business.
What Are the Pros and Cons of an Unsecured Loan?
An unsecured loan has many pros and cons to consider, and you should gain a thorough understanding of these before you make a final decision. An unsecured loan is most often used when you do not have collateral that you want to pledge or that you are able to pledge. The collateral that you use can be repossessed by the lender if you default on the loan, so you stand to lose any collateral with a secured loan. Because collateral is not used with an unsecured loan, the lender is at greater risk of loss if you default. With this in mind, the lender often requires you to be a rather strong borrower to qualify for an unsecured loan. You may have to have a better credit score, more available liquidity and strong business financials to qualify. This is opposed to a secured loan where the primary emphasis on underwriting is based on the value of the asset you are using to secure the loan. In addition to these points, keep in mind that the rates and terms on an unsecured loan are generally less attractive than with a secured loan. This is because the lender’s enhanced risk is represented in the loan terms. Nonetheless, if you have a great credit profile, you can still expect good terms from an unsecured loan. A final point to consider is that you may have access to a smaller loan amount through an unsecured loan. With so many pros and cons to consider, it is important to take a closer look at specific loan terms and requirements for an unsecured loan before you decide to apply.
How Can You Determine If an Unsecured Loan is Right for Your Current Needs?
If you are thinking about applying for an unsecured small business loan, it is important to research potential loan terms. You may be able to borrow tens of thousands of dollars or more for your small business to use, and this will largely be determined by your financial strength as a borrower as well as by your business’s strength. Most unsecured business loans require the owner to personally guarantee the loan. This means that the lender could sue you directly for funds if you default on the loan. In addition to focusing on this point, it is important to determine if the loan terms will meet your needs. Carefully research different small business loan programs. Pay attention to maximum loan amounts, interest rates and terms. You can use an online loan calculator to estimate monthly loan payments, and this can give you a great idea about how affordable an unsecured small business loan may be for your budget.
While there are some downsides associated with applying for an unsecured small business loan, this source of funding nonetheless has its positive benefits. If you are interested in applying for an unsecured loan, consider exploring the lenders and loan programs in greater detail as a great first step.