Usually, when people think of loans, the conventional definition that comes into mind is to borrow money to make a large purchase, such as a mortgage or car loan. Banks provide these loans after people go through a long approval period with the repayment tied to collateral. However, don’t forget that many financial institutions also offer unsecured business loans.
These don’t come with stringent paperwork, need a specific purpose, or require anything other than excellent credit history. If you need cash for a sudden business expense, this loan type will prove to be beneficial for your enterprise. Take a look at this quick primer to see how this kind of loan works.
Unsecured Business Loans
When most entrepreneurs apply for a loan, the funds received are secured by an asset. However, the mechanics become more complex when you need cash for business expansion. In this case, the lender will ask you to provide another asset as your collateral. It could be your home, other real estate properties, vehicles, etc.
In contrast, unsecured or no-security business loans do not require you to provide collateral. You can get this loan based on the credit history of the following:
- The business itself
- The owner of the business
- Any partners involved in running the business
As a borrower, you can get total funding merely by providing your name and signature. For this reason, other people dub this unsecured business loan a signature loan. When you analyse the situation, this places a very high risk on the lender because they cannot directly recover their money should the borrower be unable to pay the loan terms.
However, you are lent the money in good faith because of your good credit standing. And should there be an unfortunate default, the lender can take you to court and place a lien on your other assets. It may take time, but the lenders will have the means to recover the money because you provide your signature on the document that guarantees you will pay the loan terms.
How To Acquire This Kind Of Loan
Unsecured and secured business loans equate to filling up paperwork. However, the no-security loan will not require you to present collateral. Moreover, the loan approval rate of unsecured business loans is a lot faster than the traditional one. The major difference lies in how the lender examines your credit history during the application process. You may be asked to provide and submit proof of the following details:
- Credit score
- No bankruptcy or other similar judgments
- Number of years in the business
- Annual revenue
- Proof of ownership
The requirement also sometimes hinges on your relationship with the creditor. For instance, you have a strong and excellent relationship with your banker, so you’ve established trust. Hence, the bank feels more at ease to help you overcome a shortfall because they know you have integrity and spotless credit history.
Benefits Of Applying For No-Security Loan
Unsecured business loans hold several advantages over traditional secure business loans. Take a look at them below:
1. Faster Turn Around
Because your collateral doesn’t need to be appraised, you can expect faster loan application processing. In fact, with the completion of proper paperwork, you can enjoy almost instant approvals with funds in your account within the day.
2. Larger New Approved Amount
Since the loan is not tied to a property, you may be able to receive the amount you need if you prove creditworthiness. After all, in collateral loans, you are only given a percentage of the item’s appraised value.
3. Flexibility of Usage
Most of all, you enjoy flexibility when it comes to funds. Traditional loans are often hinged on an exact purpose. However, unsecured business loans are not attached to any of that. Hence, you have the freedom to use the money for your business in the way you deem fit.
Your needs and purpose will determine whether or not this unsecured loan is good for you. Knowing these details will assist you in making an informed decision. Above all, don’t forget to read and investigate to see if this loan will help you achieve your business objectives.
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