Unsecured Business Loans: Benefits vs Risks

Unsecured business loans are similar to credit cards except that such loans are solely used for business-related activities. Basically, when a loan is unsecured, it just means that the debt is not backed by any collateral. Pawning your jewelry or appliance can be considered an unsecured loan.

Your character and reputation as well as the financial history of you and your business will determine whether you get a line of credit. Since the loan is not secured, it will be harder to obtain. Before you take on an unsecured business loan, it is best that you first understand its benefits and risks.

Here are the benefits of unsecured business loans:

No Collateral

One thing that makes unsecured debts attractive is that it requires no collateral of any kind. If you are unable to pay such a loan, there is no danger that your house, car, equipment, or other property will be taken by the lender in case you fail to pay your debt. In case your business goes under, you will still have your house or your property.

Tax-Free Interest Payments

In many cases, the interests you pay in relation to your unsecured business loans can be subtracted from your payable taxes. This amount may not be big, but it may be enough to help keep your business afloat or improve the financial condition of your enterprise.

Here are the risks linked to unsecured business loans:

High Interest Rates

Unsecured business debts are usually slapped with interest rates that are higher than most types of loans. Since there is no collateral to back the business loan, lenders are forced to implement high interest rates. Besides, the administrative expenses on the part of the lender will be bigger when it comes to unsecured loans.

Stricter Payment Terms

Another risk in getting an unsecured business loans is that you cannot negotiate much when it comes to payment terms. While a secured business loan can be paid within a period of 5 years to 30 years, unsecured business debts are usually required to be paid within a year or two. However, the lender will be the one to decide the payment options that are available to you.

Unsecured business loans are a great financing alternative for business owners. But if you think that there will be no consequences if you fail to pay your unsecured obligations, think again. For one, your credit score will be substantially lowered.