Secured business loans, used as a source of business capital, are disadvantageous not only because they can lead to repossession of asset if repayments are not made. Secured business loans come with many restrictions imposed by the loan provider. The loan provider, for instance, will insist on a particular debt-equity ratio in order to safeguard the amount lent. This limits the entrepreneur’s control over major decisions on business.
An unsecured business loan, on the other hand, presents no such restrictions. The enterprise has to pledge no asset for repossession in case of non-payment. The assets are thus free of any charge, and can be disposed off as one desires.
The prime customer group employing Unsecured business loans constitutes of entrepreneurs who prefer not to attach the business assets to any obligation. Businesspersons, who have undergone bad credit history, also make use of this category of loans. Such businesspersons and enterprises are known as problem cases. Failure to pay certain debts in the past leads to county court judgements, and bankruptcy, which in turn leads to bad credit history. Such businesspersons are disadvantaged in secured loan deals. Unsecured business loans however, present immense financial opportunities before borrowers; particularly where the loan amount desired is small.
The amount received through unsecured business loans will be used for business commencement or expansion purposes, assets and equipment purchase and refinance, and to restructure finances. Some businesses use the loan proceeds as a working capital. Still others would use the unsecured business loan to finance a particular consignment. The repayment of this type of loan will be due immediately after the entrepreneur gets payment from the consignee, or any date decided.
As part of an agreement between loan provider and the businessperson, cash will be transferred for use by the business. The terms and conditions of the unsecured business loan will have to be drawn through consultations between the borrower and the loan provider.
APR is an important issue and needs to be discussed in detail. Being unsecured, the unsecured business loan is more expensive. The interest rate charged will be on the higher side. Risk is a matter of perception. Different lenders may look into a particular case differently. APR would be decided on the basis lender perceive risk involved in a particular loan request.
The principal issues you need to watch out for during the decision making process have been illustrated below: