The Pros and Cons of No Collateral Business Loans

08 Sep, 2016 / Comments: Comments Off on The Pros and Cons of No Collateral Business Loans / By

No collateral business loans, as the name suggests, enables you to get money for your business without putting down any collateral. At first glance, this sounds like the perfect situation. Funding with no risk of losing your assets down the road? Sign you up, right? Before you go running for the nearest lender, you should understand both the pros and the cons of this method of financing.

 

Pro – Get Cash Fast

No collateral business loans usually make it through the approval process much quicker than a loan with collateral because nothing needs to be appraised and/or valued. Lenders do not need to spend the time making sure you have the liquidity that you say you have in your various assets. Instead, they focus on your credentials and approve the loan based on those credentials, giving you access to your money faster.

 

Pro – Bankruptcy Can Result in Loan Discharge

If you were to meet with hard times and end up having to file bankruptcy, the unsecured business loan would simply get discharged. This means that you would not have to pay the remaining balance of the loan. If the loan were secured, on the other hand, you would end up losing the property you put up as collateral. Of course, your credit gets harmed by discharging a debt before it is paid in full, but at least you get to keep your property.

 

Con – You Will Pay More Interest

The concept behind putting collateral up for a loan is so that the lender is covered should you default on the loan. Without collateral, there is a large amount of risk the lender must take on. In order to make up for that risk, the lender will likely charge you a much higher interest rate than he would have charged if you were to put up collateral. Interest rates can hit the double digits on no collateral business loans, so buyer beware.

 

Con – You Will Get a Smaller Loan

Again, because no collateral loans are so risky, lenders are typically stingier about how much they are willing to lend to businesses. This is not to say that you will not get approved, but you might not get approved for the amount you wish to receive. Most secured loan amounts are based on the value of the collateral being used, with most lenders offering a certain percentage of that amount as a loan. With a no collateral loan, there is nothing to take back, so the lender must really consider how much they lend to you.

 

Con – It Is Harder to Get Qualified

As you might have guessed, getting approval for a non-collateralized loan can be much more difficult than obtaining a loan with collateral. The lender needs something to reassure them that you will pay the loan back. This usually means a perfect credit history, plenty of assets to serve as a back-up plan for payment, and a low amount of outstanding credit.

 

If you do not have the collateral to put up for a business loan, make sure you have your financial affairs in tip top shape so that lenders will look at your situation favorably. When you shop around with different lenders, make sure you compare the interest rate as well as the fees charged against one another to really determine which loan is the most affordable for you, not only now, but for the life of the loan. No collateral business loans can get rather costly, so make sure you do your homework before choosing one for your business.

 

William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain's Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.

Comments are closed.