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The Pros and Cons of Unsecured Small Business Loans


Lots of work at home moms and others who are starting up freelance or fledgling businesses on their own look for unsecured small business loan opportunities to help fund their start-ups or to provide for the one-time costs of equipment and physical assets. Some small business leaders don't understand what an unsecured business loan or credit line means. Unsecured business loans are a standard kind of loan that doesn't include collateral, where the amount of money that a lender offers, as well as other terms like interest rates, depend on how big of a credit risk the borrower represents.

When you're thinking about whether to use a secured business loan or one that is unsecured by collateral, keep in mind some basic ideas about which type of loan is better for your specific work at home business.

Benefits of Unsecured Business Loans

With unsecured business loans, there's may need to present collateral to the lender. That means there's no risk to existing assets like a home, vehicles, other commercial property, or long-term assets like a 401k or IRA. Some small business owners who take out secured loans tied to their assets get worried about what happens in a default situation.

Because the borrower doesn't need to document their assets in an unsecured business loan, some parts of the loan underwriting process may be easier.

Disadvantages of Unsecured Business Loans

Because unsecured business loans are based on nothing but the borrower's credit, interest rates can be much higher than those for secured loans that are tied to assets. It's important to keep an eye on the interest rates that lenders offer and think about how easy these will be to repay in the future.

For those without squeaky clean credit, unsecured business loans can have a particularly high debt load. Some lenders won't contemplate customers with subpar credit, and others will lend at usurious rates that can trap a start-up company in eternal debt.

Lenders that offer unsecured business loans need to really go over their potential borrowers' balance sheets with a fine toothed comb. This can take time and effort, and some who apply for unsecured business loan opportunities can be aggravated by the bureaucracy of the process.

These days, lots of lenders are fairly skittish about their unsecured business loan offers. It may seem to borrowers as if the lender is paranoid or unfair, but these companies who offer unsecured capital to businesses are just paying attention to their and bottom line. Because the lenders have the money, the lenders make the rules, but some unsecured loan situations can become combat and troublesome, where the borrower may have been able to prevent some headaches by doing more to control her costs to avoid financing of a business.

The above are some key considerations for the kinds of small businesses that moms create from their homes; small businesses that may or may not rely on unsecured capital in their beginning stages or further down the road.

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