Whenever you meet a person who is either running his own business or is a CFO of a company or works in a financial department, you will always find them talking about money, budgets, account receivables, account payables and notes payables which are also known as loans.
A loan is an act of borrowing something from a person known as a lender. The person who borrows is a borrower and the most common thing borrowed is money. Most companies around the world borrow money from banks to operate money. However, for this, they look at the most optimal options, which suit their need like no security business loans.
Therefore, what is a no security business loan or unsecured business loan? To understand loans, you have to become a lender so that you can understand how the money is flowing.
No Security Loan:
It is a common practice of many financial institutions that they ask for something (mainly asset) which they can keep as a security against the money they lend to you. This security is known as collateral. The reason behind is that they want to secure their money so that if you are unable to pay the money back with interest, they can sell out the asset and recover the capital amount at least. This loan is known as a secured loan.
However, No security loans or unsecured loans are those in which a borrower does not need to give any collateral against the amount to borrow money. They get the money only based on their credit score and a signature of the loan payment back agreement. This makes a loan unsecured for a lender, and hence it is called an unsecured loan.
As far as the definition is concerned, no security loans are very attractive, isn’t it? But wait are they feasible for your business? Let us evaluate their feasibility.
Are no security business loans feasible?
To get your no security business loan, you have to first be qualified for this. The qualification criteria are simple. You must have either a good credit score or a guarantor with a good credit score so that a lender could give you the money with assured that his money is safe and you will pay his money back.
But if you qualify for the loan, does it mean that you have to take one? You have to look upon the following to decide if whether you should go for no security loan or not:
1) Interest Rate Risk: Whenever a lender lends his money, he charges interest on it. The interest rate depends upon the payback period mostly. However, your credit score is also a very important point to set an interest rate for your loan. A lender usually charges a high-interest rate upon those borrowers who are risky. Like if you have a low credit score, then a lender can or may charge you a high-interest rate because high-risk, high return rule and most of the time no security business loans are risky so lenders can charge a high-interest rate compared to the economy’s interest rate.
2) Upfront processing fees: Be aware of the upfront processing fees of your loan. There is a chance that the institution from whom you are applying for the no security loan may charge different fees according to the amount borrowed or type of no security loan.
3) Is early loan payoff allowed? Read the document very carefully or set the terms and conditions very carefully for the payoff of your loan. You might be amazed that why early payment is a risk? Look from the lender side. He has given you money to pay him back in a year. In this period, he is charging interest upon every remaining payment. If you pay him a loan earlier, although it is very good and it should be your priority, a lender will lose the interest gains and hence can charge a part of anticipated interest earnings so be aware of that.
4) Is your information protected? This could be a concern for you. Although banks or your lender should take care of your information, this could be a concern so you must look at it too.
5) Be aware of upselling: Some lenders may add an option of “unexpected incident insurance” which means that if something happens to you and you are not able to pay the money, then an insurance company pays the lender the insurance claim money. So if you are opting for such kind of insurance, do consult an agent whom you trust because the premium might be more than your agent is offering.
6) Method of amortization of your loan: Amortization general meaning in accounting is dividing the capital amount throughout loan maturity and adding interest to calculate the total amount a borrower has to pay. Make sure you have that amortization schedule and also ask which type of interest. Because in simple interest you are paying interest on the borrowed amount however in compound interest you are giving interest on every remaining capital amount. So be aware of that.
7) Process complication: Looking at the definition of no security business loan, it is a simple product. Like there is a borrower and a lender. A lender gives his money, and the borrower takes money. However, if the process is not simple but complicated, your instant must say that something is wrong and need to be very careful or the best option is to change the lender.
The bottom line of our discussion:
No security business loans are also a viable option for a business to borrow a loan. But if the option is viable, it does not mean that you should opt for it. These loan companies are always making money because their customers are not so educated regarding the hardcore working of this service and the heavy jargon used in the terms and conditions of a product. A common person cannot understand the terms and conditions of opening an account even. Right?
So no security business loans not as simple as they sound by their definition. No one will give his money without being assured that he will make a profit. This makes no security business loans not so different from others. They are or can be very complicated however they have some perks as well like you can get them in a day, you can have them without giving anything as collateral to the lender which means your asset is secure and many more. Just analyze the terms and conditions wisely that what you need and when can you pay the borrowed money back with interest.