The Key Differences Between Secured and Unsecured Loans

Typically, if we can avoid taking a personal loan then we would do, but they make a lot of sense in business. As a small business owner, you’ve probably already taken out some form of a loan in the past or you likely intend to in the very near future. Having that cash injection precisely when you need it can help your business from dropping profits and allow you to streamline expensive-to-run services.

There are various reasons why a business might take out a loan. Whether you need new equipment or intend to hire new employees, the reason you’re taking out a loan will dictate the amount you need and the type of loan to be taken out. Depending on your company’s needs and the provider you choose, your loan will either be considered secured or unsecured.

What Makes Them Different

The difference between secured and unsecured business loans is straightforward. Secured loans require you to lay down some form of collateral to put up against your lending so that should payments be missed, the property or asset you’ve given as collateral will be taken and sold. Unsecured loans are considered riskier for lenders because there’s no pledge in place to give up some of your business’s assets.

Unsecured Loans

Less Risky For Borrowers: If you can avoid putting down any sort of collateral then you should. You could wind up losing your home and cars in the process of losing your business and that’s an all-or-nothing situation a lot of business owners aren’t prepared for. Taking an unsecured loan would still incur penalties for missed payments but at least this would remain contained within the business itself.

More Flexible: Unsecured loans tend to come with much more flexible repayment plans. Spreading costs for the maximum term isn’t always essential but it makes it a lot easier to manage and those funds can be better spent on your operations. Most providers will offer unsecured business loans with repayment terms ranging between six months and three years, though the interest is adjusted accordingly.

Higher Interest: Unsecured loans don’t give any guarantee to lenders that they’ll receive their money back. They can use expert financial advisers to look at your bank statements and credit score to predict whether you’ll be able to pay it back, but there’s still no guarantee. Unsecured loans as a result typically come with much higher interest rates – if you spread the repayment for the longest term, you’ll end up paying the highest amount.

Secured Loans:

Can Borrow Larger Amounts: With secured loans, lenders have their guarantee and are prepared to roll out substantially higher amounts, usually up to around half a million dollars. This sort of funding can really get operations off the ground and allow you to make any necessary changes to your current business model. Payment terms are typically between one and two years for large secured loans.

Lower Interest Rates: Secured loans keep money in the bank by saving you a ton on interest. It’s a much lower financial risk for lenders to offer secured loans so it allows them to keep the interest rates down, usually to somewhere between 10% and 13%. The money you save on interest could be used to help pay off the loan or free up cash for other projects and research.

Protected by Collateral: Putting down collateral for a secured loan can be dangerous, especially assets like your home or office. Secured loans can be upwards of half a million and if you’re struggling to find that sort of cash, you’re going to lose your assets too. Secured loans provide an essential service to business but they should be used responsibly and by those who know they can pay them off.

Summary

The type of loan you take depends entirely on the size and needs of your business. If you’re looking to expand your services then going with a secured loan would give you access to much larger lending quantities, but this would require using property as collateral. Buying new tools or paying for a state-of-the-art website wouldn’t require borrowing too much so an unsecured business loan would be ideal.

There are great providers out there for secured and unsecured loans that are more responsive to the modern business’s needs than traditional banks. Just make sure to borrow what you need and have a solid strategy in place for paying it off.