Bank loans come in two forms: secured and unsecured. While secured loans place borrowers at risk through the use of collateral, unsecured loans place the risk on the lending institution because its issuance is based solely on your creditworthiness.

Uses

Examples of unsecured consumer loans are education and signature loans or credit cards. Unsecured business loans have their purposes. For example, they are typically used for short-term purposes, such as hiring staff, upgrading equipment, inventory purchases and cash flow shortages. Most temporary business needs can be covered by unsecured loans. Before searching for an unsecured business loan Birmingham, consider whether your need falls into these categories.

Interest Rates

Because unsecured loans place the risk on the lending institution, their interest rates are significantly higher than secured loans. However, most of the time, these loans actually save the borrower money when compared to secured loans, despite their increased interest rates due to the reduction or lack of processing and other fees and shorter loan terms. Unsecured loans allow businesses to overcome temporary challenges and take advantage growth opportunities.

Leverage

Secured loans have assets that can be collected if the borrower defaults, but unsecured loans are not backed by assets. Instead, they are backed by the borrower’s creditworthiness and promise to pay. Although your business assets are not used as collateral on unsecured business loans, your personal guarantee is required. This means that you can lose personal assets or be sued for the unpaid balance of these loans.

Time

It is more difficult to get unsecured business loans due to their high risk to the lender, but some lenders have higher unsecured loan lending rates and looser qualification requirements. In addition, the approval process is quicker and the loan funds can be accessed much faster than secured loans because underwriting is not necessary and these loans have less paperwork. An unsecured loan can be approved and distributed within 24 hours.

If your company needs some short-term cash, consider researching an unsecured business loan.