Getting Approval for Unsecured Business Loans
Business loans, whether secured or unsecured are more difficult to obtain than individual loans for similar amounts. However, a business loan can be used toward the purchase of anything, while individual loans are often limited in scope. Business loans must be flexible in order to be effective. The different expenses that face a business are vast, and every business is different. An individual will never get signature loans for the purchase of a car for example, but businesses certainly do. When an individual seeks to buy a vehicle, part of the financing agreement directly links the vehicle to the loan. Essentially, the person is in the process of buying the vehicle from the bank. If they miss payments, the bank can come get their property.
With unsecured business loans banks cannot simply repossess property. There is no direct property associated with the loan. This means that if the loan holder defaults, the bank will have to sue for their money. Then they will attach assets as they find them until the value of the loan has been taken. The lack of direct collateral has pluses and minuses. For the business owner, the lack of direct collateral means they cannot simply lose everything for missing a couple of payments. The process to get a judgment for non-payment of debts is actually quite long. The owners of the debt must demonstrate that they have attempted a variety of collection methods with no success. Only after they can show that will a judgment be issued. However, if the debtor makes payments, even if they are not regular it is much more difficult for the loan issuer to gain a judgment or lien in court.
There are pluses to unsecured business loans for the lender as well. The lack of direct collateral allows the bank to charge significantly higher interest rates. The reasoning is that their risk factors are much higher, so they need higher interest to offset the risk. While these loans may be at a slightly higher risk of default, the interest rates charged on these loans are often more than three times higher than secured loan interest rates. The default ratio is nowhere near three times as high. This means that ultimately, banks are making much more from these types of loans. Plus, for lenders with very strict criteria for issuing loans, the default ratio is even lower. As with any good loan, both sides experience benefits from this type of loan.
To qualify for unsecured business loans you must either have excellent credit or be prepared to pay a higher than normal interest rate on an already high interest loan. If you have poor credit you may need to find a lender that specializes in your credit bracket to be approved at all. Not all banks work with every credit score. Before applying check both your own credit score and your businesses DUNS score to see which of you is more likely to qualify for unsecured business loans.