Business owners often need to turn to credit as a source of cash, whether it is to grow long-term, or meet immediate cash expenses like working capital. Because many businessmen may not be able to produce a collateral such as a home or a commercial establishment, unsecured line of credit is a handy solution. Basically, banks and other financial institutions provide credit without the borrower needing to provide a fall-back collateral. It is a great way to get cash fast and easy. However, the high risk may mean higher interest rates or stringent qualification rules. A number of options exist in the market, and making a choice can prove difficult. Here we decode two primary types of credit sources— unsecured business loans and unsecured credit cards.
What Are Unsecured Business Loans?
An unsecured business loan is a traditional loan that is offered only on the borrower’s creditworthiness and not on any collateral.
Advantages of Unsecured Business Loans
- No Collateral: Borrowers can easily obtain the loan because it does not require collateral.
- Separates Personal And Professional: Even if the borrower defaults on the unsecured business loan, the lender cannot take any of your business’ property.
- Generally Dischargeable: In the event of bankruptcy, court may generally discharge an unsecured business loan, but never a secured business loan. However, one still needs to be careful because a court will never discharge even an unsecured business loan if the creditor has already obtained a judgment against the borrower.
- Higher Loan Amount: Loan amounts can very high especially for established businesses with good revenue flow.
Disadvantages of Unsecured Business Loans
- Requires Strong Credentials: Lack of collateral does not mean that the borrower is off the hook. In fact the borrower credentials are thoroughly checked before issuing such loan.
- Higher Interest Rates: Unsecured business loans have higher interest rates than secured ones due to the higher risk to lender.
What Are Unsecured Credit Cards?
A non-traditional credit source, an unsecured credit card is a revolving credit account for small business expenses, offered without a collateral. The eligibility and credit limit depends on the credit rating of the business and the tenure of the business.
Advantages of Unsecured Credit Cards
- Quick Access to Cash: It is an easy and fast way to gain valuable emergency cash for small and short-term business expenses.
- Flexibility: Unsecured credit card has various payment options such as paying the full amount, paying the minimum due, converting to EMI etc.
- Separation: They allow the businessman to naturally separate personal and business expenses and help the business build creditworthiness.
- Bonuses And Reward Points: Many business credit cards offer special reward schemes or bonuses, posing a financial advantage.
Disadvantages of Unsecured Credit Cards
- Lower Credit Limit: Generally, credit allowance is lower for unsecured credit cards than for unsecured business loans. It may not support larger expenses.
- Higher Annual Percentage Rate of Charge (APR): An unsecured credit card often entails a higher APR than an unsecured business loan, making it imperative to use it carefully so as to not pile on debt.
What to Opt For?
Businesses who have been in business for a long time and have a strong revenue flow and credit score should opt for unsecured business loans. It makes sense for businesses seeking large loan amounts for large and long-term growth. On the other hand, the businesses that are just starting out or have lower expenses and immediate cash needs on a monthly basis must avail unsecured credit cards.
The decision to choose unsecured business loans or unsecured credit cards thus stems from the nature and stage of business.