Every business, small or medium needs finance at the certain point of time. It can be borrowed to pay for a new equipment, smooth out cash flow, or for expansion.
Regardless of the reason, small and medium-sized companies rely often on secured and unsecured business loans, either from banks or online lenders. However, many people are confused about which type of loan they should opt for – Secured? Or unsecured?
In this post, we will talk about the distinctions between secured small business loans and unsecured small business loans.
Unsecured Business Loans
This type of small business loan needs no collateral but it is solely based upon the creditworthiness of the borrower. If you have a good credit history, then you can easily obtain an unsecured loan. However, the interest rate of such loans is quite higher.
Unsecured small business loans have no guarantees and no asset backing. They are short-term loans that are fairly small amounts.
Banks and other financial lenders also offer unsecured loans that are usually provided for educational loans, property improvements, personal loans and credit card purchases. Getting these loans approved is quite difficult unless you have a stable source of income and a strong credit history.
Because the lender relies on your agreement associated with your business, loan terms reflect that risk. A lender may want the money back so it might be less inclined to offer a huge amount as there is no guarantee if you don’t pay the borrowed amount.
Few examples of Unsecured loans are Signature loans, Credit Cards and Student Loans.
- No need to pay collateral
- No risk losing your collateral
- Easy to borrow a small amount of money
- Higher interest rates
- Small borrowing amount
- Personal Liability
- Shorter repayment terms
- Secured Small Business Loans
Secured Business Loans
As the name suggests, these types of loans are secured as they are backed up with some form of collateral. Collateral is a pledge as security for loan repayment. It means if you cannot repay your loan then you may lose your collateral.
The concept is as same as when you take the loan to buy a car, the bank keeps the deed to your car until you repay the full amount, including interest and fees. If you are unable to make payments, the bank put a lien on your vehicle.
If you are looking for a substantial amount of money, then secured loans should be your first choice. Lenders usually give a large amount of money if you have a valuable asset to keep as collateral that back-up the loan.
Few examples of secured loans are Mortgages, construction loans, auto loans, and home equity line of credit.
Few examples of collateral for secured loans are land, offices, cars, jewelry, and other valuable assets.
- Lower interest rates
- Longer repayment terms
- Higher borrowing limits
- Some assets are needed to “secure” the loan.
- Risk of losing collateral to the lender if you are unable to repay the loan.
- Longer repayment terms means you will be in debt for longer.
Which small business loan is right for you?
The loan type right for you depends largely on the situations you are in and your goals. A secured loan will offer better terms like higher borrowing limits, lower interest rates and longer repayment schedules. But if you don’t have anything to provide collateral, or you are more concerned with just paying your debts instantly or not worried about paying higher interest rate than unsecured loans are the right choice for you.