Any loan advanced towards businesses is termed as a business loan or commercial loan. All kinds of businesses like (sole-proprietor, partnership, start-up, etc) can avail of it. Banks, as well as NBFCs, provide this type of loan to businesses as per their terms and conditions.
Business Loan is of two types: Secured Business Loan and Unsecured Business Loan.
Secured Business Loan requires collateral as security that is tied to the term loan. If the business owner defaults on this type of loan, then the lender becomes the owner of the provided collateral.
Unsecured Business Loan, on the other hand, is a relatively risk-free option for borrowers as no collateral is required for the loan.
Small businesses, start-ups, etc can avail this type of loan and use the finances to expand their business.
Pros of taking an Unsecured Business Loan
Unsecured Business Loan comes as a blessing for start-ups and small business owners who do not have collateral to provide for a secured loan. The various benefits of taking an unsecured loan for business are as follows:
1. No Collateral is Needed
The best thing about an unsecured business loan is that it does not require collateral. Had this not been the case, then many start-ups and small businesses would not have been eligible for a business loan. Instead of the collateral, the business plan and market opportunities are considered by the lender to sanction this loan.
Since as a business owner, you are not submitting any collateral, then the lender may ask for your personal guarantee. This is basically a legal declaration stating that if you cannot pay back the loan, the lender will have the legal rights over your personal assets.
There is no requirement of a guarantor as well.
2. No risk of your Asset being Seized by the Bank
Since no collateral is hypothecated to the bank/lender, there is hardly any scope of property seizure. If you default, the lender will not have any direct control over your property and will have to go to court to get an order to seize any of your personal assets.
If businesses file for bankruptcy, then courts may discharge the loan which is very unlikely to happen in the case of secured loans.
3. Short Loan Application Process and Fast Approval
One can get an unsecured business loan sanctioned in as early as 24 hours. A secured business loan, on the contrary, is an extensive process and a bit time-consuming as the lender has to carefully evaluate and authenticate the collateral provided.
For an unsecured loan, the lender doesn’t have to evaluate collateral. This saves time and other aspects of eligibility are quickly evaluated.
4. Strengthens credit history
Taking an unsecured business loan is a great way to build your credit history if you don’t have any. This can be of great help in applying for loans in the future as banks often consider one’s credit history before sanctioning a loan. Lenders are cautious to provide loans to individuals who do not have a credit history. If you repay your unsecured loan on time, they will also improve your credit score, thus multiplying the chances of future loan sanctions.
5. Flexi Options
Some banks allow you to take Flexi loan for your business. You can withdraw any required amount within the credit limit offered by the bank. Regardless of the limit approved by your bank, the interest will apply only to the withdrawn sum. You can make part repayments without any penalty.
Cons of an Unsecured Business Loan
1. Higher Interest Rates
Since there is an unavailability of collateral, it can be risky for the lenders. So, in order to offset the risk, the lenders charge a higher rate of interest as compared to secured business loans.
2. Difficult to get sanctioned
Due to the unavailability of collateral, banks/ lenders thoroughly examine many aspects of business, like the business plan, cash flow, etc in order to minimize the risk.
3. Smaller Loan Amount
Due to the high risk involved in this type of loan, lenders avoid sanctioning a big loan amount as it will be difficult to recoup in case a person defaults to repay. However, in the case of secured business loans, the collateral adds to the security of the lender and hence results in a bigger loan amount sanction.
Despite the cons, unsecured business loan is a great option for those who do not have collateral to provide and have an urgent requirement of funds for their business.