What is an unsecured business loan?
A lot of our clients ask this question when they first contact us, and this is due to the fact that most potential business owners and entrepreneurs don't even know that unsecured business loans are even an option.
So, let's help fill in some of the blanks for you by breaking it all down.
- By definition, an unsecured business loan is just like any other type of unsecured loan. It is a loan that is issued and supported only by the borrower's creditworthiness, rather than by a type of collateral. An unsecured loan is one that is obtained without the use of property as collateral for the loan.
- What does this mean for you? It means you don't have to risk losing your house if your business fails. Having to put down no collateral means that the bank takes the majority of the risk, and the only thing you are responsible for is paying back the loan.
- Unsecured business loans are easier to obtain than secured business loans because your business doesn't need to supply collateral. In the unfortunate case that your business fails, lenders can seize the collateral if your business defaults on a secured loan, but a lender can't take any of your business' property if it defaults on an unsecured business loan unless they obtain a court order. Finally, if your business files for bankruptcy, the court is far more likely to discharge unsecured loans, but it won't typically discharge secured ones.
- Due to the lenders taking the majority of the risk, unsecured business loans typically 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. Typically higher interest rates also cause the individual loan payments to be higher and more difficult to afford, but we work with all lenders to ensure you get the lowest rate possible. Lastly, 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, so maintaining great credit history is vital to success.
No matter what loan type you choose, there is always going to be risks and rewards. Secured loans may offer lower interest rates in some cases, but putting your company or home in the hands of the bank is not worth it. Reward yourself with the piece of mind that your home or business will always remain in your hands and not the hands of others.