What’s the Difference? Secured vs. Unsecured Business Loans

The goal of owning and operating your own small business isn’t just about providing value and service, but to expand it over time, generate revenue, and be your own boss. Doing so, from the very start, is not cheap. You need to cover the cost of equipment, employees, inventory, and have the capital ready for it all.

It would definitely be nice to have a money-growing tree in your backyard, where you could casually go pluck a few banknotes, pocket them and go on your merry way. But that’s not the reality.

To get extra funds for your business, you need to consider the financing options available to you, such as secured and unsecured business loans or business lines of credit.  

What sort of a loan, you say?

There are two types of business loans that we will cover in this article: Secured Business Loans and Unsecured Business Loans

What are secured business loans?

In a nutshell, secured business loans are secured by the lender with assets you provide, often allowing for longer repayment terms and a lower interest rate. In the case of a small business, you would be expected to put up some of your own business assets as collateral. This collateral can include business or personal related items; like real estate, construction equipment, or a car.

So, let’s say, a construction company needs a secured business loan, they may choose to put up their bulldozer as collateral. And if they can’t pay off that loan, the lender will seize the bulldozer to cover their loss. That’s why it’s important to pay off your secured business loan on time to reduce the risk of potentially losing your assets

Now that you have a good understanding of the basics of secured business loans, let’s go through some pros and cons.

Pros —
  • Lower interest rates: having collateral reduces the lender’s potential risk
  • Longer repayment terms: lowers interest rates to smaller payments
  • Easy to obtain: especially for well-established businesses
Cons —
  • Requires securing assets: you can lose them if you don’t pay off your loan
  • Lower interest rates can have variable rates: this results in fluctuating payments
  • Longer repayment terms: can also mean being in debt for a longer time
  • Easy to obtain: borrowing more than needed & inability to pay off

Ultimately, traditional lenders, like banks, often provide lower payments, lower interest rates, and a longer term when there is collateral involved. If your business has valuable assets and you decide to go with a secured business loan, be sure to make regular payments in full and on time, (don’t lose that bulldozer!)

That’s why a lot of small businesses choose unsecured business loans from alternative lenders.

Check out how Lending Loop is helping small businesses get funded.

What are unsecured business loans?

An unsecured business loan is one of the best funding solutions for small businesses. It requires no personal or business assets. But as a small business owner, you must be able to show lenders an excellent credit score, financial history, and detailed cash flow analysis.

Let’s take a look at some pros and cons of unsecured business loan.

Pros —
  • Easy to obtain: no need to supply collateral!
  • Fast & simple process: some lenders approve applications within 24 hours
  • Higher loan amounts: no collateral requirements limiting the loan value
  • Keep your bulldozer: lenders can’t seize collateral if you default without a court order
Cons —
  • Higher interest rates: quite risky for lenders
  • Shorter repayment terms: some lenders require frequent payments, so be prepared to pay off the loan quicker
  • Difficult to qualify: with a poor or nonexistent credit history, lenders won’t approve your application

In the end, be sure to have solid plans for your small business before choosing the type of loan you want to apply for. Do your research, window shop around, speak with a broker, or us — we’re always happy to provide you with the best loan solution. Don’t forget to be responsible and hold onto your assets.

Interested in applying for a small business loan? [click here]

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