An unsecured business loan is a type of loan which is solely based on the creditworthiness of the business borrower assessed via income, financial documents, etc. rather than a collateral. One can avail this loan for reasons such as business expansion, equipment purchase, inventory, cash flow management, and more.
Check out the pros and cons of an unsecured business loan below.
Pros of unsecured business loan
1. No collateral
This loan does not require a business or personal collateral. Instead, lenders assess the business income of the borrower to approve the loan amount and check your business loan eligibility. If the income is high, the loan amount is also high.
2. Faster loan process
One can easily apply for a business loan online since the documentation process is minimal and quick. Also, since there is no collateral, the time used for asset evaluation is saved and the disbursement process becomes faster.
Besides, many lenders also offer pre-approved business loans so you can receive the borrowed amount within a week of loan approval, if not earlier.
3. No risk to business assets
Your business assets like commercial property, vehicle, inventory, etc. will remain risk-free since you do not have to provide a collateral to obtain an unsecured loan. Even if you fail to pay your EMIs on time, a lender cannot seize your business property.
4. First-time applicant
If you are a first-time applicant with no credit history, this is the best way to build one. But make sure to pay your EMIs on time to avoid default. In this way, if you need to borrow funds in the future to finance an important business venture, you will have a credit history to support your loan application.
Additional Read: Benefits of Availing Unsecured Business Loans from NBFCs
Cons of unsecured business loan
1. Higher rates of interest
The business loan interest rate for unsecured loans as compared to secured loans is normally high. Because unsecured loans are collateral-free loans, a lot of risk is involved. Thus, to balance the risk, most lenders offer unsecured funding at a higher rate of interest.
2. Tenures are shorter
For an unsecured business loan, the maximum tenure is usually around five years, which is short in comparison to a secured one with typically more than ten years. However, lenders usually stick to shorter tenure in case of unsecured loans to minimise the risk involved.
3. Risk a lower credit score
In case you fail to pay your EMIs on time and default on the loan, your credit score will be lowered. Besides, if you have a bad credit score to start with, you may find it difficult to avail unsecured financing since you cannot provide a collateral to offset your bad credit.
Additional Read: How to get a Startup Business Loan without Collateral
Looking for a business loan? You can secure quick, hassle-free loans for your business at Tata Capital. We offer attractive loan deals with convenient interest rates,tenure, and repayment terms. Our documentation process is quick and minimal for faster turnaround time.
For more details, contact us today!