Business financing today is sourced via various different options, out of which collateral-free business loans have received remarkable favour among borrowers. Financing a business’ diverse funding needs such as machinery and equipment purchase, working capital financing, leasing new premises for business expansion, etc., has thus become simpler than ever. An unsecured business loan is also available against simple terms laid down by various lenders.
However, like any other source of financing, the loan option also comes with its set of advantages and disadvantages. Here are some of them listed to help you make an informed borrowing decision.
Advantages of Unsecured Business Loans
1. Zero collateral requirement
As its name suggests, an unsecured business loan does not require the borrower to provide any asset as collateral, and is sanctioned with only the applicant’s creditworthiness assessment. Thus, businesses that have maintained high credit worthiness with a reliable history and a score above 700, availing this business loan should not be a hurdle.
You can also plan to meet your financial liabilities in time and in full to avail the loan conveniently based on your past repayment records. Other factors like credit utilisation ratio, fixed obligation to income ratio, and maintaining a balanced mix of credit also help maintain a high creditworthiness, thus improving the chances of quick approval of the collateral-free advance.
2. No risk to business or personal asset
The loan sanction and its liability repayment solely depend on the borrower’s income availability and financial stability, with no involvement of asset pledge or hypothecation. Thus, any risk to business or personal asset is also eliminated.
With this advantage, the lender cannot stake a recovery claim on personal or business asset even if the EMIs remain unpaid. That being said, as a responsible borrower one must also make sure to make timely EMI repayments. Below is a detailed explanation to it.
3. Helps build credit history
Timely payment of EMIs towards the collateral-free business loan repayment liability also helps first-time borrowers build their credit history. The history is a summation of credit behaviour of individuals over a given period.
In case of unsecured loans, repayment gains further weightage due to the higher risk involved and increased borrower responsibility. Thus, if repayments are made timely and in full, it shall reflect in one’s credit history over the time, and consequently the credit score, its numerical representation.
4. Hassle-free approval
With an increasing online processing and reduced paperwork, approval for unsecured business loans has been simplified. Eligible applicants can thus glide through loan processing to receive simple approval within a short period as compared to secured advances.
With all the requirements in place, businesses can also receive approval for the advance under 48 hours of applying, with the loan amount disbursed to their account shortly. With pre-approved offers provided by certain lenders, availing the loan only becomes easier and less time-consuming.
5. Flexibility of repayment
To make repayment convenient for borrowers, financial institutions also provide flexible repayment options. Such tenure can extend up to 3 years, enabling repayment in easy EMIs as per the business’s affordability. Plus, with an availability of sufficient funds, businesses can always opt to prepay the loan amount through part-prepayment or foreclosure against low to no charges.
6. Multi-purpose financing
Collateral-free business loans also come with minimal restriction to end-use. You can thus utilise the loan amount to fulfil any business funding needs, right from consolidation of small debts into one to paying daily wages, and purchasing costly equipment.
Disadvantages of Unsecured Business Loans
1. High credit score requirement
As these are collateral-free advances, availing the funds comes with a must-have requirement of high credit score. Thus, it is not possible to avail the advance if an individual carries a lower score. In that case, you would need to apply with a co-borrower holding a high score or look for secured funding options. To avoid such situations and keep your door to unsecured financing open, it is best to hold a responsible credit history. Also, timely repayment through EMIs is a must to avoid hurting the score.
2. Shorter tenure
While the tenures for these advances are flexible, they are also usually short as against secured funding options. You must thus carry a concrete repayment strategy to efficiently repay your unsecured business loan in time without any delay or default.
3. Higher rates of interest
Due to a higher risk to the lender, collateral-free advances often come with an increased interest rate margin as against their secured counterparts. Nevertheless, if businesses carry a higher eligibility than the basic requirements, they can leverage their borrowing position to negotiate for reduced rates. They can also look for financing during festive seasons and compare lenders to arrive at the best rates.
While the cons of a collateral-free business loan can seem demanding, sticking to a financial discipline throughout with proper plan in place can help bypass these limitations. Financing high-value unsecured business loan should not thus be a limitation for an eligible candidate.