Unsecured business loans are finance options, such as credit cards and lines of credit, that require no collateral. Unsecured business loans tend to be much easier to get than bank loans, which require extensive documentation of business activities as well as company and personal assets.
But interest rates on unsecured business loans tend to be considerably higher than on other types of business credit, says smallbusiness.chron.com.
The report offers the following guidelines.
- Obtain applications for unsecured business credit by speaking to a representative at your bank. Your banker can help you sort through the options and explain the difference between business credit cards and business credit lines.
Your bank may also be able to help you determine whether you are eligible for lower-interest, secured business credit.
- Put together the bank account information you need and complete the applications. These applications will usually just involve filling out a few lines providing contact and bank information, as well as your social security number.
- Apply for unsecured business credit as part of an overall financing plan that also includes other types of credit options, such as bank loans and personal loans.
Save money on interest payments by using lower-interest alternatives for longer-term debt, such as major start-up and build-out costs that will take more time to pay off. Whenever possible, use your higher-interest, unsecured business credit to pay for short-term expenses such as inventory that you will turn over quickly.
If you can, transfer balances from unsecured business debt to secured financing options to lessen the amount you spend on finance charges.
Advantages and disadvantages of an unsecured business loan
If you start a new business or you want to expand an existing one, you may consider third-party financing, such as a business loan. There are two types of business loans: secured loans and unsecured loans.
While a secured business loan is backed by collateral, an unsecured business loan is not. Obtaining an unsecured business loan has advantages and disadvantages.
About unsecured business loans
Lenders who offer unsecured business loans will not require your business to pledge any collateral to obtain the loan. However, you must still meet income and credit requirements. Some lenders may also offer businesses a revolving line of unsecured credit.
Unsecured business loans are easier to obtain than secured business loans because your business does not need to supply collateral. While lenders can seize the collateral if your business defaults on a secured loan, a lender cannot take any of your business’ property if you default on an unsecured business loan unless he obtains a court order.
Finally, if your business files for bankruptcy, the court may discharge unsecured loans, but it will not typically discharge secured ones.
Because unsecured loans are more risky for lenders, they usually include higher interest rates than secured business loans, which means your business will pay more over the life of the loan than it would have paid for a secured loan of the same amount.
Higher interest rates also cause the individual loan payments to be higher and more difficult to afford. Finally, unsecured business loans are harder to qualify for. If your business has a poor or nonexistent credit history, the lender may not approve your application.
Defaulting on any type of business loan, including an unsecured one, will affect your business credit rating. Though a court may discharge an unsecured loan in bankruptcy, it will not discharge it if the creditor has already obtained a judgment against you. Some lenders may offer partially secured loans, which are secured with collateral that is not worth the full value of the debt.
Pros and cons of a conventional loan
One point disadvantage of a conventional mortgage loan is that equity builds faster because of the higher down payment expected upfront.
On the other hand, the higher down payment makes it more difficult for some consumers to obtain a conventional loan.
With the larger down payment expected on a conventional mortgage loan, as much as 20 per cent in many cases, the lender may not require the borrower to have private mortgage insurance, which can be a plus. Conversely, if the borrower does not have a significant down payment, the PMI will likely be required and the borrower must then meet the requirements of a mortgage insurance provider, which is essentially like applying twice for loan approval.
Concerning conventional mortgage loans, down payments may need to be authenticated as belonging to the borrower, showing the lender that the applicant has saved to obtain the loan or that the down payment is a gift from someone and not a loan that person expects to be paid back.
A disadvantage of conventional loans for borrowers with lower credit scores means higher interest rates and fees often become part of the loan terms.
The lender may also demand a higher interest rate if it is allowing the borrower to include part of the closing costs into the loan. Conventional loans may carry higher interest rates than some government loan programmes.
Lenders generally offer conventional loans with a choice of fixed or adjustable interest rates, with many having fixed rates for a predetermined number of years. This can be a plus for borrowers. On the downside, adjustable-rate loans can result in fluctuating monthly payments.
Terms and Conditions
A plus to conventional loans is that lenders may be more willing to negotiate terms and conditions than with a government-backed loan where the lender must follow standard guidelines.
In addition, conventional loans, on average, are processed faster than any government-backed mortgage. But borrowers may be required to pay a non-refundable fee at the time of applying for the loan.
And if approved, the terms of a conventional loan may include a stiff prepayment penalty, meaning the borrower will be subject to this charge if the loan is repaid early.
With a conventional loan, the decision on qualification belongs solely to the lender and there may be fewer restrictions on the applicant’s personal financial situation than a government-backed loan.
On the other hand, a bankruptcy or home foreclosure in the past can significantly decrease a potential borrower’s chances of obtaining a conventional loan. Many lenders require a long waiting period in which the consumer will be expected to repay credit.
For a conventional loan, lenders consider the applicant’s debt-to-income ratio, the relation between the amount of money required to meet debt obligations each month such as auto loans and credit card payments and the amount of monthly gross income earned. The lower the debt-to-income ratio, the better terms the borrower may be offered