The Need of Acquiring an Unsecured Business Loan
Unsecured business loan is commonly used by borrowers for start-up businesses, or even for small purchases such as computers, office or home improvements, or unexpected necessary expenses. It is a type of loan that is not collateralized by lien – the right to take a property if an obligation is not met or in the case of bankruptcy. It is a debt granted to borrowers that is supported only by the strength of the borrower’s credit history, reputation, potential earnings, and other assets owned by the borrower.
Unsecured business loan is also called Signature loan because the lender only takes the borrower’s word for it (that is why it is also called as Good Faith Loan) and has nothing to acquire but his or her signature. The lender can not take any possession such as house, lot, car, or any valuable belonging. The borrower signs a promissory note stating the terms and conditions, that the loan will be paid over an agreed period of time but typically for a short term only, usually a period of 1 to 5 years. The lender will ask a co-maker or guarantor to sign the note as well, pledging to pay the unsecured loan in the event of failure to pay at the agreed time by the main borrower.
This takes higher risk compared to secured loans so the interest rate for unsecured business loan tends to be much higher and a lump sum payment is usually required. However, for people who do not have any collateral to pledge, this unsecured business funding is very much appealing. Apart from that, some unsecured business financing firms offer processes that help eliminate unnecessary applications that may result rejection. This could possibly damage the borrower’s unsecured business credit lines along the way and hinder their ability to qualify for future loans. Having a good credit standing is imperative in acquiring this loan because the better your credit history is, the better is your interest rate and the higher loan amount you can get.