Unsecured loans can be accessed by entrepreneurs without having to affix any collateral in their loan agreement. Typically, this makes it a preferred choice for many business owners as there is no fear of losing an important property if they are unable to make loan payments.
But, if you are inclined towards applying for an unsecured loan, it is important to keep in mind that like any financial product, such loans come with their own share of pros and cons. Firstly, interest rates charged on unsecured loans are on the higher side compared to traditional secured loans.
And, most importantly in order to be eligible for an unsecured loan, you will need to boast a spotless credit history. Here are some types of unsecured loans you can potentially avail to get your business started:
- Credit Cards
Any credit card will typically act as a sort of unsecured loan considering the fact that you are lending money from the credit card issuing organisation and are intending to repay them back the borrowed amount at a later date.
- Payday Loan
This is one type of unsecured loan that has gained considerable popularity within a short frame of time. It is a type of loan typically availed from institutions that don’t have a financial background wherein the borrower will secure just enough capital to meet their operating expenses until the next big pay day comes along. Such loans are convenient, even if it usually includes high interest rates and a transaction fee that is considerably higher than normal. Be warned, some businesses have been known to charge up to a whopping 400% in interest on payday loans!
- Line of Credit
Another type of unsecured loan offered by most financial institutions is known as a line of credit. But, if you have collateral, then a line of credit can also be considered as a secured loan. However, in most instances a line of credit is extended to a business as part of an unsecured loan. Business owners who are approved for a line of credit have a cap on the funds they can avail, which is usually determined by their own credit history. In order to be accepted for this loan, typically you will have to maintain a pre-existing account with the lending institution.
- Cash Advance
Have you ever checked your credit card statement and noticed that the interest rate charged on a cash advance is considerably higher than the usual rates?
Basically there are two forms of cash advances: income based advances or credit limit based advances. Similar to other types of unsecured loans, a higher interest rate is charged on cash advances while at the same time the repayments have to be made within a considerably shorter time frame. A majority of cash advances need to be repaid by the time of your next billing cycle or payday.
- Signature Loans
Such loans have been innovatively named so, as the only thing stopping you from acquiring funds is your very own signature. Typically in such loans all you need to do is assure the financial organisation or lender that you will repay the amount you intend to borrow. Such loans are usually awarded in instalments can be secured from most credit unions or banks. The borrower usually makes set monthly repayments, till the entire amount borrowed has been paid off. Such types of loans are usually charged a lower rate of interest than most other types of unsecured loans. Therefore, it goes without saying that signature loans are the preferred option for most first time entrepreneurs.
- Peer to Peer Loans
Another unsecure yet increasingly popular way of borrowing funds is through a peer to peer loan, wherein a borrower has to rely on individual lenders rather than a business entity. The approval process for peer to peer loans is usually quicker than traditional bank loans. Additionally, various individualised types of loans such as invoice finance, cash flow finance, property finance etc. are available that can be availed based on the borrower’s current requirements.
- Term Loans
Such loans are provided for a pre-determined amount, that both the borrower as well as the lender has agreed upon beforehand. The repayment schedule for such loans are also usually very specific and they can be made in monthly, biweekly or bimonthly payment rates. A floating interest rate is usually charged on term loan repayments.
By being aware of the many different options at your disposal to secure the required capital for your business, you considerably increase your chances for being approved for at least one type of loan.