You are looking to raise funding for your company, but suddenly you find yourself torn between two types of business loan: secured and unsecured. Many business owners do not know the difference between these two types of loan, and there are significant differences between them.
Put simply, a secured loan is the more viable option for those businesses looking to borrow a large sum of money. However, compared to an unsecured business loan, a secured loan is a riskier form of funding for borrowers since it requires a business to offer something as security against the debt, for example, company or personal assets such as property.
Even though secured loans usually come with lower interest rates, some lenders will ask for additional fees upfront, which in turn actually increases the price of borrowing.
What is an unsecured loan?
On the other hand, an unsecured loan doesn’t require you to put any company collateral as security. Therefore, these types of loans are great for businesses who are looking to borrow a smaller amount of capital. While unsecured loans mean that you don’t have to risk any personal or company assets, most will require a personal guarantee to confirm payment of the loan if the business cannot keep up with its payment.
What are the advantages of unsecured business loans?
Unlike secured business loans, in theory, unsecured loans are less risky as you are not in danger of losing any of your assets if you can no longer repay what you owe. Typically, unsecured business loans can also offer more flexibility than secured loans since most lending companies tend to offer repayment terms of anything from one month, up to three years.
Unsecured finance applications are also often quicker and less complex to process than their secured counterparts and capital can be accessed within a few days. The use of a guarantor also means that their credit history will be assessed instead of those who are borrowing, which allows unsecured finance to be accessed by those with lower credit ratings.
Who are unsecured loans best suited to?
Industries such as retail and leisure are well suited to unsecured business loans since the terms of lending favor those companies who are prone to having unexpected expenses which only need short-term loans to bridge the gaps.
These types of loans are also great for new businesses, and for business owners who don’t have any property or valuable equipment to put up as collateral. Realistically, unsecured business loans can be taken advantage of by many business types. However, they may be better suited to the following types of business:
- Businesses who need funding quickly
- Businesses with poor credit scores (350+ FICO score minimum)
- Businesses that are less than two years old
- Businesses who do not have assets to use as security
- Businesses that can afford to pay slightly higher interest rates
In short, there are many differences between unsecured business loans and their secured equivalents. Take a good look at what type of funding your company requires and consider which type of these loans would be more beneficial to you.