alleryStart learning →On what basis is an unsecured loan granted?
AOn specific assets pledged as collateral
BOn the firm's creditworthiness and record
COn the value of the firm's fixed assets
DOn a guarantee from the stock exchange
Answer & Solution
Correct answer: B. On the firm's creditworthiness and record
1. Unsecured loans rest on the firm's creditworthiness and the lender's previous experience with the firm.
2. An unsecured borrower does not have to pledge specific assets as security.
3. Secured loans are the opposite: they require collateral the lender can legally take if the borrower does not repay.
4. Borrowers whose credit is not strong enough to qualify for unsecured loans are the ones who use secured loans.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 16 "Understanding Financial Management and Securities Markets", section 16.3 Obtaining Short-Term Financing_
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