When seeking capital to fund your business, you may look towards a loan. Whether your business operates as an LLC, S-Corp or C-Corp, you may get approved for a loan if your business is financially healthy. However, there are several different types of business loans, one of which is an unsecured loan. Today we’ll take a closer look at what are unsecured business loans and how it could benefit your business.
What are Unsecured Business Loans?
Unsecured Business Loans: The Basics
An unsecured business loan is any loan that is not backed by collateral. To determine whether or not you are a good candidate for an unsecured business loan, the bank will scrutinize factors like credit history, profits, time in business and your business plan.
This is in stark contrast to a secured business loan, which requires the business owner/borrower to use property as collateral. With a secured loan, business owners with a bad or no credit will have an easier time getting approved. However, they must also have the necessary property to use as collateral.
There are a variety of structures used to organize unsecured business loans. A revolving line of credit, for instance, allows the borrower to continue drawing money from the bank, up to a specified limit, as long as the borrower makes payments according to schedule. A traditional non-revolving loan offers the business owner a flat amount, which he or she must pay back in small increments.
Benefits of Unsecured Business Loans
The primary benefit of obtaining an unsecured business loan is the simple fact that it doesn’t require collateral. Business owners are often hesitant to use collateral to secure loans, fearing that it could come back to hurt them later down the road. If you are unable to pay back a secured loan, for instance, the bank may take ownership of the property used as collateral. This isn’t a problem with unsecured loans, as there’s no collateral used to secure them.
Disadvantages of Unsecured Business Loans
On the other hand, obtaining an unsecured business loan can be difficult if you have bad credit or no credit. New businesses typically lack the credit worthiness of their established counterparts. And without a strong credit history, banks may be reluctant to issue an unsecured loan. With that said, there are ways for new businesses to build their credit. This will increase the chances of getting approved for an unsecured loan.