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Why Go for an Unsecured Business Loan and How to Make the Most of It

Why Go for an Unsecured Business Loan and How to Make the Most of It
For small businesses and start-ups, arranging for the right kind of funding at the right time is often a challenge, especially when they approach financial institutions. That is because most business loans are secured in nature and require you to pledge collateral. And a small business often lacks relevant assets that can be pledged. So, why is unsecured business loan good news? You can avail the loan amount you need without putting any asset on the line, as long as you have a decent credit score. Read on to find out how unsecured loans are helpful and the things you need to keep in mind to make the most of them.

Why go for unsecured business loans?
As you do not need to offer any collateral for these loans, they get processed and approved fast. So, you get the funds you need on time. Most leading financial institutions have simple eligibility criteria for these loans and do not ask for too many documents. Plus, you have the flexibility to use the loan for different needs of your business, as long as it is legal. Moreover, the loan amount is not limited by the value of any asset, as is the case with secured loans.

            ALSO READ: Fuel Your Business Growth With Unsecured Business Loans

How to make the most of unsecured business loans?


1. Maintain a good credit score – Since an unsecured business loan does not require you to pledge any collateral, your credit score determines whether you are capable of paying back the loan on time. For a good credit score, make sure you pay all your existing EMIs on time and avoid applying for multiple loans simultaneously. A good credit score will help you to negotiate on the interest rate too.

2. Try to repay the loan quickly – Though many lenders offer flexible repayment tenures these days, try and pay back the loan as quickly as you can. With a short tenure, your total credit burden will be lesser than what you will end up with in case of a long tenure. Plus, paying back the loan quickly will help you earn the lender’s trust, help you forge a bond, and get bigger loans easily in the future. 

3. Make sure your business forecasts are accurate – Any financial institution will assess your business’s projections and forecasts to understand how profitable it will be, as per industry standards. This will help them understand if you can comfortably pay back the loan or not. So, make sure that all the projections are accurate and realistic and not over-optimistic. This will convince the lender that you are a sensible borrower and they will approve the loan request faster.
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4. Avoid multiple applications – Approaching multiple lenders at the same time for an unsecured business loan is not a good idea, as it shows that you are desperate. This is because, a financial institution will ask for your credit report from the credit rating agency the minute you apply for a loan. The credit rating agency will take this as a hard inquiry and this will cause your credit score to go down a bit. And if you approach multiple lenders, your credit rating will go down a lot more, since the credit rating agency will consider this as multiple hard inquiries.

5. Be careful about the loan amount you request – As mentioned before, the loan amount in case of unsecured business loans is quite flexible, and you can avail a large sum, if need be. But, you must make sure that you can repay as per the required timeline, or else your credit score and your impression on the lender will suffer. Also, repaying the loan amount should not exert a big strain on your cash flow and make it tough to buy equipment or pay rents and wages. And remember that the bigger your loan amount is, the riskier you will be considered as a borrower. ALSO READ: Is An Unsecured Loan The Right Option To Fund The Growth Of Your Business

All in all, an unsecured business loan is your best choice for urgent funding needs, as long as you keep the above pointers in mind. The short processing time, flexible terms, and the fact that you do not have to put any asset on the line, make this kind of loan attractive. Just remember to compare lenders, eligibility criteria, interest rates, tenures, and even repayment modes, before deciding to go with one.


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Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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