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About Unsecured Business Loan
Every business requires working capital to run its operations smoothly. Some companies generate enough cash flow to cover their expenses and run the business steadily.
However, some companies require financial assistance to run their operations fluidly using loans.
Companies have many options when it comes to acquiring a small business loan secured or unsecured. In this post, we will understand what is unsecured business loan and how it works.
What Is Unsecured Business Loan?
An unsecured business loan is a loan that does not require any physical asset or collateral to obtain financial aid, unlike a secured loan where the borrower needs to have a physical asset like inventory, equipment or real estate kept as collateral against the loan obtained.
Even if there is no security help in unsecured loans, these loans are backed by a personal guarantee or a U.S. Uniform Commercial Code (UCC) lien.
If the loan is obtained through a personal guarantee, the borrower is personally responsible to repay the loan and if the loan is not repaid, the lender has the right to seize your personal assets to recover the loan.
If your business loan is backed by a UCC lien, the lender has the right to seize your business assets if the business defaults on the loan.
In UCC liens, lenders usually submit them to your secretary of state’s office after the loan agreement is signed between you and the lender.
While filing the lien with the secretary of state’s office, the lender has an option to file against a specific business asset or file a blanket lien that will give the right to the lender to seize any of the business assets if you default on the loan.
How Does Unsecured Business Loan Work?
If you are planning to acquire an unsecured business loan from a traditional lender it could be a challenging task. You will probably have to guarantee the loan in person.
This means that if your company is unable to repay the loan, and there is no security of repayment, you as the borrower are personally responsible for repaying the remaining loan balance.
If you are getting a loan from an online lender, such as a credit card company, you do not need a personal guarantee. Non-guaranteed loans almost always have higher fees and interest rates.
Unsecured loans work just like any other type of loan financing and can be in many types, like term loans, credit lines, invoice financing, and even cash advances.
Regardless of the type, unsecured business loans always offer faster financing with easier application processes compared to loans with collateral.
What Are the Benefits And Risks Of Unsecured Business Loans?
Benefits:
This type of financing can give good benefits to a business.
- No Collateral Required: The main advantage of unsecured loans is that you have the freedom to use your business and personal assets as you like. For example, if you have equipment that is not under collateral, you can sell it to fund other business opportunities. You can also set off accounts receivable in order to speed up the money conversion cycle. If you have huge expenses to take care of, you can sell out your inventory to cover those expenses.
- Faster Approval: Turnaround time for unsecured loans is faster as you skip evaluation of collateral as a result it takes less time for underwriting. In addition, many modern lenders use an algorithm to evaluate and approve unsecured loans because they are smaller than the average property or equipment loan. This makes the process of getting the loan easier and faster.
- Less Risk: Being able to sell an asset whenever you want is not the only advantage of unsecured financing. You can also use the asset to keep the company running if you do not repay the loan. This will give you a chance to come back and eventually pay off the lender.
Risks:
There are a few risks that you might need to consider.
- Higher Interest rate: Since the lenders are taking higher risks by providing you with an unsecured loan, the interest rate on these loans is usually higher than secured loans.
- Higher Fees: The fees for acquiring this type of financing are also usually higher compared to any other secured loan. Make sure that you read the loan documents and check for the fees section to decide if the loan is worth it.
Conclusion
Unsecured loans might look good at first glance. You can get money without losing risk.
This type of loan is a great financing option for companies that do not have many assets, companies that do not want to provide collateral, or any company that is growing rapidly and needs immediate financing.
In fact, most successful small businesses do not use unsecured loans due to costs.
