The world of unsecured funding is as full of possibilities as it is questions. I am always on the lookout for ways to help people find the funding resources that fit their needs. During a recent foray into financial research I came across a simple, but pivotal question about lending. What does the term “unsecured” mean when referring to business loans? To answer this question, we’ll need to go back to basics; lending basics that is.
What Does it All Mean?
In order to understand the difference between secured and unsecured business loans, we’ll need to cover all of the bases. Let’s start with secured funding.
A secured loan is based on two things; credit and collateral. The amount of money you get is based on your credit score. Upon approval, that money has to be insured or the bank won’t lend it. Collateral is a type of asset-based insurance that will negate the lending risk to the bank. In other words, if you fail to pay the loan back or default on it, the bank can take possession of the collateral in order to recoup their losses. Collateral is usually a mortgaged property, land, or a vehicle.
Unsecured Business Loans
A good way to think of unsecured funding is, it’s unsecured if it’s uninsured. Let’s take a closer look at what that statement actually means.
Unsecured loans are based solely on your credit and/or repayment history. There is no collateral-backing required. Terms and conditions depend on the lender, so this means the funding may be easier or harder to get than a traditional loan. Unsecured loans come in the form of credit cards, lines of credit, reserve lines, and other credit-based lending sources.
The Application Process
Here’s where things get a little sticky, so pay attention.
You may have heard that the biggest benefit of unsecured business loans is that there’s no credit check. The truth is it depends on the lender. Some lenders require a credit check; others require evidence of a satisfactory payment history. There is a two-fold way to prepare for this requirement. Have a credit score of 660 or higher and have supporting documentation that shows a solid payment history. That way, whatever the requirements are, approval isn’t an issue.
In addition to the question of credit, there are a couple of other things to consider. The interest rates and fees for unsecured business loans are higher than traditional loans. It’s best to have a financial plan in place before applying that ensures you can afford the additional expenses while paying the money back. Also, be aware of predatory lending. Whether you are applying online or through a company; make sure they are fair and reputable. Always read through and be sure you fully understand everything before signing an agreement.
From the simple to the complex; unsecured financing creates a lot of questions for borrowers. Now, that you know what an unsecured loan is, you can start investigating the possibilities that it creates as well.