Today’s financial business etiquettes dictate that for every transaction that’s made, there must a collateral of equal value that should be handed down to each of the two parties involved in the transaction. And this is generally the way that everyone does business. So imagining a situation where the transaction is made for no collateral to sate another party seems highly plausible but this practice indeed exists.
Enter Unsecured Credit
So what exactly is unsecured credit?
One can say, in layman’s terms that unsecured credit is a kind of transaction where a financer does not have a collateral to protect his investment. In more complex terms, Unsecured Credit can be defined as credit which is not collateralized by an asset and this when unpaid cannot be recouped with any form of asset seizure from the other party. On top of that, in many instances there is no legal decree that is in place when such payments are issued so the creditor cannot go to any law enforcement commission to file any form of legal complaint.
Unsecured credit is most relevant in case of transactions made by family or friends where is there is no time limit or guarantee when one can expect their money back.
Despite the risks involved, this is actually quite a common practice in business and many organizations use such means to finance their operations. This is especially relevant in case of budding entrepreneurs, who have no startup capital to finance their operations and often resort to investments from friends or family or in a cases, few shady loan sharks for startup investments. The fact that unsecured credit is easy to acquire makes it a very tempting proposition for most as they aren’t bound by legal pressure and can focus on the business and maximizing its efficiency.
Means of obtaining Unsecured Credit
Unsecured credit comes in many types, most being a form of loan to another person via some means or another. Stated below are some forms of unsecured credit loan types:
Unsecured credit is fairly simple and easy to acquire on a small scale than any secured form of credit. They can be paid off without much external pressure and can be borrowed from friends and family if one so desires. On a larger scale however, this is an entirely different story. It is difficult to lend huge amounts of capital without any form of assurance. That is why venture capitalists ask for such exorbitant returns on their finances to the entrepreneur. Similarly financial institutions ask for some form of collateral (Assets namely) before they issue money to the borrower.
In the end however, it all falls down to the requirements of the businesses and the business owner/Entrepreneur to decide which form of credit (secured or unsecured) is in his best interest. A consultant CFO can be hired for suggestions in this regard.