If you are a small business owner, you may get to a point in operations when you need a large lump sum of money to expand. The old saying goes “you have to spend money to make money.” An unsecured business loan is a perfect opportunity to expand your small business.
Unsecured Versus Secured Business Loans
An unsecured business loan is a funding solution. You will not be required to put any personal or business assets down as collateral, unlike a secured business loan. Financers will assess your credit score, profit margins, and longevity of your business before granting you an unsecured business loan. You can hire a broker or apply for a loan on your own.
Interest Rates
Without the collateral, the financing institution is taking on more risk. If you fail to pay back your loan, they cannot seize your collateral as payment. You must have a good credit score. If your credit score is too low, the financing institution may deny you. It will cause your credit score to drop further as they do hard credit checks.
Due to the risk, an unsecured business loan’s interest rates may be higher than a secured loan. In the world of financing, the larger the risk, the higher the interest rates.
Beware of Alternative Lenders
Unsecured business loans through a financial institution may have a difficult application process but are the best funding solution for your small business. Alternative lenders for unsecured loans such as payday loan advances have bigger risks for the borrower. Often, these alternative lenders will require borrowers like you to give them access to your bank account. They will lend you the money but the requirement will be the company can automatically withdraw payments from your account. Typically, this cycle ends poorly with the borrower in a constant state of debt.
Restrictions on Usage
Small unsecured business loans typically do not have any restrictions. You can use the loan for operational fees, leasing a new building, or anything business-oriented. There are a few basic restrictions set by law. For example, you cannot use the money to gamble or fund any illegal activities.
Liens on Your Assets
If you fail to pay back your loan, the financial institution can file a lien on your assets. They cannot seize your assets immediately like a secured business loan, but they can take you to court. It is a much harder process for lenders to seize your assets as they will require a court order.
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