When you make a decision to start your own business, especially a small business instead of working for another company or entrepreneurs you are taking a brave decision filled with obstacles as well as unseen risks. Not only do you have to start scratch, but you might be starting with little-to-no prior experience or even a stable cash flow to sustain your business idea. It takes a good amount of time for your business to generate revenue and for the ups and downs to stabilize. There is no guarantee that your business will be profitable or your business will make a brand name for itself. Besides all the risks, you need a business loan for the financial part of it. You have two basic options from banks being secured and unsecured business loans, besides the new age options such as angel investors or websites such as Kickstarter for a project.
Unsecured business will be given to you without any kind of security from you. They are made strictly on the basis of your credit score and rating and some other methods the financial institution uses to determine your creditworthiness. They by default carry a greater risk to the lender because they are the unsecured kind. Hence they inherently have a higher rate of interest than secured loans and are also more difficult to obtain. Most lenders require an exceptional rating on your CIBIL score, no bad marks on your credit history, and some even require that you have been in business for at least 2 years. Therefore, the unsecured business loan works best for established business borrowers with excellent credit history. They are not ideal for start-up funds or if you have a less-than-exceptional credit score.
A secured business loan is “secured” or pledged against some sort of asset from you, which can be sold to be able to cover the cost of the loan amount by the financial institution in case the you are unable to pay the loan repayment. However, an unsecured business loan is a monetary loan and has no security asset, hard/tangible or otherwise. With the additional critical difference coinciding with the fact that there is no collateral required to secure the loan, another advantage is that the borrower is only charged some interest on the amount borrowed.
Unsecured business loans are available in the following financial categories or packages from a financial institution, such as:
The interest rates that are chargeable on unsecured business loans are generally nearly higher when compared to secured business loans. This is due to the fact that in case of the secured loan, it is a sure shot, one way or the other, the lender will be repaid. This is the opposite in the case of unsecured business loans. In these, the bank’s options for recourse are severely restricted in the event that the borrower defaults. Hence, unsecured business loans come with higher interest rates.