Typical Repayment Timeframe for Unsecured Business Loans

Most business loans typically require collateral to pledge for the loan. However, when one doesn’t want to place their business or personal assets for the loan, they need to consider other options such as unsecured business loans or the no-collateral business loan.

Unsecured business loans

An unsecured business loan is a funding option for those businesses with no personal or business assets as collateral. There is no burden of providing collateral for the businesses looking for funding options in case of these loans. Thus, any business can get the funding it needs without putting its assets on the line.

Collateral is something that is pledged as security for repayment of a loan and helps distribute the financial risks fairly for all parties involved. Some examples of collateral for secured loans include houses, offices, real estate, valuable personal property such as vehicles, jewelry, rare collections, and financial property such as stocks and bonds.

However, it is not easy to qualify for unsecured business loans as interest rates are much higher, but there are no risks for the business owners. The normal repayment timeframe for unsecured business loans is 1 month to 5 years, depending on the lender.

As unsecured business loans options are plentiful and loans diverse, one finds an ample number of lenders happy to offer unsecured business loans wherever their business is. So, why are they so eager to accept unsecured business finance, despite the higher interest?

Why do businesses prefer unsecured business loans?

In the case of unsecured business finance, there is no need to pledge collateral. Most businesses usually pursue an unsecured loan when they are not able to meet the criteria for a traditional loan or are unable to negotiate better terms for repayment. They find the personal guarantee terms associated with the unsecured loans to be very generous. Thus, many businesses prefer unsecured business loans.

The reality is that it is a win-win situation for small business lenders but not necessarily for the business. The higher amount of interest one can be monumental and can impact the business’s credit adversely. These loans are offered a short-term loan because of the inherent risk involved in an unsecured business.Still, it can be challenging for any business without collateral to get a loan in case of a need for additional financing. 

As a business owner, one has to weigh the pros and cons and evaluate if the unsecured business loan interest is really worth it. It is essential for them to understand the benefits and drawbacks of taking out unsecured business loans and how do they differ from secured loans.

Difference between secured and unsecured business loans

Every business owner should be well familiar with the two basic types of loans, secured and unsecured loans, and their difference. Once you understand these loans and how they are structured, it will be easier to determine the best loan option for your business.

  • Secured loans are supported up with some form of collateral, while there is no need for any such collateral in case of unsecured business finance.
  • Examples of the secured loan include construction loans, mortgages, and auto loans, while unsecured loan instruments can be credit cards, student loans, and signature loans.
  • Secured loans offer benefits such as higher borrowing limits, lower interest rates, and longer repayment terms. Unsecured business loans are easier and faster to borrow and do not carry any risks of losing your collateral.
  • Secured loans will need some valuable assets to work as collateral and involve longer repayment terms. Key drawbacks of unsecured loans include higher interest rates, personal liability, shorter repayment terms, and smaller borrowing amounts.
  • Although the application processes for secured and unsecured loans are similar, there are some differences. Lenders always look at the credit history and credit scores for both types of loans. Those with poor credit history should be ready to take out loans at much higher interest.
  • Unlike secured loans, unsecured business loans can be discharged in bankruptcy. Although no business plans on going bankrupt, things can get awry at some point and bankrupt a business if one is unable to take care of the debts.

Secured or unsecured loan- Which one to apply for?

The kind of loan you apply for largely depends on the type of business and your financial circumstances, and business goals. A secured loan is a much better option for those who are looking for lower interest rates, longer repayment, and better terms for higher borrowing for their business.

Some business owners are not concerned about paying a higher interest rate and have a secure plan in place on how to pay back the loan as soon as possible. In these cases, one might opt for an unsecured loan, especially if they do not want to provide collateral. These loans sound more attractive to the borrower as they make for fast funding and quick qualification, especially if you carry a strong credit history. 

However, before you go ahead and apply for an unsecured business loan, it is essential to assess your business situation carefully.

Before taking out unsecured business loans

Even though unsecured business loans look and sound attractive because of faster processing and no collateral risks, you should certainly think twice before taking them out. Unless you have a strong credit history and a consistent source of revenue, it can be challenging to get these loans approved.

There are plenty of horror stories where unsecured business loans have gone wrong for business and individuals as they became a victim to the loan sharks out there looking for people in desperate situations. The major downside is the very high-interest rates and the shorter repayment period. Personal guarantees are required in case of unsecured business finance, and one may face stricter qualification requirements.

While the loans may sound very appealing to businesses in dire situations, they carry very unfavorable terms, and things can quickly spiral out of control. Thus, one has to be very realistic about how one can pay these loans back. There is no denying that unsecured business loans is risky for all.

Even if one is not providing collateral in case of unsecured business loan interest, they are still primarily responsible for the loan. So, in case you default on the loan terms, your lender could sue you, and you could lose your personal assets. That can have far-reaching negative consequences for your business, your personal assets, and your image. Your business will face harassment of collection activity and the lender may pursue you personally as well and can get a court order to access your personal accounts.

If you or your business does not have assets to offer, avoid taking out unsecured business funding options. Keep in mind that lenders are not worried about your business and focus more on protecting their investment and lower the risk of collateral-free cash.

While there are some distinct benefits regarding unsecured business loans, you will not be able to take out large sums of money for your business as there is no collateral. Defaulting on an unsecured business loan can create big trouble for yourself and your business because of higher interest rates. You could lose all your assets and land in financial issues. Hence one should avoid taking out an unsecured business loan and use them only when there are no other options left to get funds for your business.

Final word

Every business owner interested in getting extra capital first needs to examine its current financial situation and credit history. Even though unsecured business loans make sense in some cases, there is always the pressure of paying back a loan with a higher interest rate and in a shorter time. Pursue a secured business loan instead if you’re concerned about paying higher interest rates.

Whatever kind of loan you decide depends on several factors such as the assets, the plan for the funds, business health, type of lender, and the credit history. As your business is most likely to need more money, it is critical to keep your credit history and the financial wealth of your business in good shape. Prepare in advance and start managing and monitoring your business as well as credit, as that can have a significant impact on your ability to secure a business loan of any type, secured or unsecured.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.