Secured vs. Unsecured Business loans

When it comes to business loans, there are two basic options. You can get a secured loan, which involves putting up collateral, or you can get an unsecured loan, which, as the name suggests, is not secured by collateral. Before you decide on what type of loan to get, you need to make sure you understand each option and its advantages and disadvantages.

Secured Loans

A secured loan is often preferred by lenders because they are getting a guarantee of some payment should you default. Whatever you put up as collateral for the loan can be taken in the event you default. However, this is a risk for you. If you can’t abide by the terms and do default, you could lose your car, your home or even your business, depending on what you used as collateral. In addition, your collateral needs to be appraised so you can prove how much it is worth and persuade the lender of its value. Typically, lenders will offer a lower value for an item because they will have to sell it at a lower value should you default, but if you can prove its worth with a recent appraisal, you can often get them to offer a higher value, which will help in terms of how much you can borrow.

The good point of this type of loan, though, is it is lower risk for the lender, so you usually benefit from this in terms of interest rates. Rates are usually much lower for secured business loans than for unsecured loans.

Unsecured Loans

Because an unsecured loan only rests upon your word that you will pay it back, it is a higher risk to lenders than a secured loan. You will see this in the interest rates you are offered, which will be on the higher side. In addition, your business’ credit will be highly scrutinized to ensure you have the ability to pay back the loan and can be trusted to do so. Because of this, this type of loan can be more difficult to get and the payback term is usually shorter than secured loans. However, the upside here is that you aren’t having to risk losing any assets if you default because you don’t have to provide anything as collateral.

When you are considering business loans, make sure to carefully weigh the pros and cons of secured and unsecured loans. While you may get better terms and interest rates with a secured loan, you have to think about the possibility of losing your collateral. With an unsecured loan, you don’t have that worry, but you pay for it with higher interest and shorter terms.