Businesses will typically utilize collateral to secure loans. This collateral is bound to the term loan, so if a small business owner fails to pay this secured loan, they must surrender the collateral to the lender. Essentially, the collateral provides protection to the lender in case they aren’t paid.
But no security business loans are also an option for business owners. Unsecured business loans do not require collateral which can be less risky for applicants.
1. Short loan applications process
The business loan application process can be tedious. Financial institutions want to make sure that businesses make payments on time and will ultimately repay their debts in the total amount.
Because of this, they thoroughly examine every application. It is true for both secured and unsecured business loans.
When collateral is given, the lender must thoroughly examine the collateral to determine if it is valuable. It is a time-consuming process. But when it comes to no security business loans, there is no need to appraise any collateral and instead the focus is on other critical factors such as the credit report of the business and the monthly sales, and the length of time they have been in business.
This straightforward application process often results in funds being distributed swiftly. Usually, the funds are released after 24 hours of application. A majority of businesses seeking financing will need funds sooner rather than later. Because of this, an unsecured business loan is often a good option.
Receiving funds the next business day can be advantageous if you are in a tight spot when it comes to funds. Because of this, many business owners will choose this type of loan.
2. Collateral is not required
A majority of businesses lack collateral. For example, startups may not have any resources of value to offer lenders as collateral. It would make the startup ineligible for a majority of secured business financing options.
But when it comes to unsecured business loans, there is no requirement for collateral. Instead, other considerations such as business plans and marketing opportunities are examined when qualifying for a loan. In a majority of cases, startups and businesses that lack collateral can still be eligible for an unsecured business loan. Because of this, you might want to pursue unsecured business loans first if you fall into this category.
Since you won’t be providing any collateral, the lender may require a personal guarantee for the approval of an unsecured loan. A legal paper states that if you cannot repay your loan, the lender will have the legal right to collect your personal assets.
3. There is no risk of losing any collateral
Secured business loans have the protection of specific assets. As an example, you might apply for a mortgage that is secured by the property itself. If you fail to make a payment, the lender would be able to have control of the property since it was utilized as collateral.
With unsecured business loans, the lender will have to go through legal proceedings in order to seize any asset. In some cases, a lender may be given authority to seize properties to recoup losses on the loan. However, if the business owner already filed for bankruptcy, it is possible that the law may discharge the unsecured loan.
However, secured loans are rarely discharged via bankruptcy or any other method. Collaterals that are tied to the loan are typically awarded to the lender.
Any small business owner interested in extra working capital will first need to examine its current condition. In the majority of cases, unsecured business loans will be the best route since it has a straightforward approval process and lower risk for the borrower. In some cases, a secured business loan will be more advantageous for your business, especially if you have a low credit score. It is critical to consider the needs of your business and make your decision based on this.