Successfully launching a small business is hard work. In fact, over 50 percent of small business fail in the first five to ten years.
Many businesses fail because of capital issues, not because of the business design or concept. Over 80% of failed business is due to lack of cash flow as the primary reason.
One solution for cash flow problems is applying for a loan. In 2016, nearly 70 percent of small businesses used external financing.
A popular option for small business contractors is an unsecured loan. Read on to learn how to find the best unsecured loans for your small business. Explore the terms and conditions that result in the best unsecured loans.
What Is an Unsecured Small Business Loan?
Before shopping for the best unsecured loans, it is important to understand what an unsecured loan is. Unsecured loans are primarily issued based on the applicant's creditworthiness. This means that factors like payment history and credit score play an important role.
Issuing a loan based on creditworthiness is a big departure from secured loans. On a secured loan, the bank requires collateral from the applicant in order to issue the loan.
In many cases, this means that the applicant uses their primary residence as loan collateral. If there is a default on the loan, the lender can start the process of seizing the property. It is possible to use other assets besides the primary residence as a source of collateral.
What Are the Benefits of Unsecured Loans?
There are many benefits to an unsecured loan for your small business. For starters, the financial risk is transferred to the lender when collateral is not required.
Because collateral is not required, the application process is faster and easier. Industry experts compare the process to a credit card application. Loan approval can come in 24 hours or less.
For a secured loan, however, the applicant is required to itemize all assets to be used as collateral. The valuation process by the bank can be timely.
For example, a home appraisal may be necessary to gauge the value of the property listed as collateral. Due to time-consuming steps like these, loan approval can take up to one month or more.
When you default on a secured loan, your assets such as a primary residence are vulnerable to seizure. Another benefit to an unsecured loan is referred to as dischargeable debt. Not only are your assets secure on an unsecured loan, but you may be able to discharge the debt in bankruptcy proceedings.
What Are the Disadvantages of Unsecured Loans?
Because the lender bears the risk on an unsecured loan, interest rates and credit score requirements could be higher with select lenders. There are numerous financial repercussions of higher interest rates.
As alluded to above, credit score requirements are higher for unsecured loans. You will likely have to demonstrate a strong credit history in order to receive low cost loan and approval.
Applicants with lower credit scores may require a cosigner to reduce risk to the bank. This means that another individual will be financially liable if you default on the loan.
Another potential disadvantage is the possibility of prepayment penalties. Consider a situation in which business is booming and you seek to pay off the unsecured loan in its entirety.
It is recommended to ask the lender if they have prepayment penalties as this can be avoided with some direct lenders.
What Are Other Loan Requirements You May Have to Fulfill?
Secured loans are known to have strict application requirements. These requirements include revenue verification and operating length. For instance, the lender may require that the business has been operating for 2 years and earns revenues of $100,000 per year.
On the other hand, unsecured loans are known to have more flexible requirements. Each lender is different, so make it a point to read up on these requirements before applying.
How Can You Shop for the Best Unsecured Loans?
To find the best unsecured loans, search for the most favorable terms and conditions. The most important variable is the loan's interest rate.
This rate drives both the monthly payment and the total financing cost of the loan. The lower the interest rate, the better the deal for the borrower.
The lender may try to lower your payment by extending the loan duration. The duration is also referred to as the loan term.
This is why it is important that the borrower does his or her due diligence. Request that the lender advise you on the total finance charges over the entire loan term. The most prudent financial decision will be to select the loan with the lowest total finance charges.
Another good strategy for consumers is to avoid loans that include arbitrary and expensive fees. For instance, avoid prepayment penalties that punish borrowers who pay off their balance ahead of schedule. In addition, avoid loans that charge application fees or other frivolous charges.
Your credit score may also dictate your strategy when shopping for the best unsecured loans. If you have a low credit score, you may be willing to accept a higher interest rate to avoid the cosigner requirement.
Those with a high credit score, on the other hand, have more flexibility. These consumers should place little emphasis on credit score requirements and instead focus on the best interest rate and term combination.
Lastly, shopping for the best unsecured loans entails finding the best fit for your business. Each lender has specific requirements such as how long has the business been operating for.
Some lenders may require income verification and operating length. Before starting an application, make sure your business can meet these requirements.
Wrapping It Up
Obtaining an unsecured loan may be exactly what your small business needs to thrive. Shopping for the best unsecured loans is about finding terms and conditions that fit your business.
While interest rate and term are important, there may be other factors in play such as fees and credit requirements. If you want to learn more about finding the best unsecured loans for your small business, please contact us for assistance.
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