If you are looking for funding for your business, you might have come across the terms secured and unsecured business loans. Understanding the differences between the two is an important step to having good financial health. Both have their advantages and disadvantages so it is important to know what they are so you can determine which one is right for your business. In this article we are going to break down what they both are and discuss the differences as well.
What Are Secured Loans?
A secured loan is normally easier to get because it is less risky for a lender. If you have poor credit or are rebuilding your credit, lenders will consider you for a secured loan instead of an unsecured loan. Secured loans also tend to have lower interest rates and higher borrowing limits which enable you to have access to more money.
Secured loans are protected by an asset. They are risky because if you fail to make the payments, the asset that you provided as collateral can be used to pay off the loan instead. So if you are short, you are liable for it. For example, if you purchased a home or a car, that can be used as collateral. This is to make sure that you will not default on payments and repay the loan.
The advantages of secured loans are:
- low rates – the rates are lower than unsecured because the lender has less financial risk
- high borrowing limits – lenders are confident they will get their money back, either from loan repayments or sale of the property
- long repayment terms – you have more time to make the payments
Examples of secured loans are mortgages, home equity line of credit, auto loan, boat loan, and recreational vehicle loan. Lenders often require the asset to be maintained or insured under certain specifications to maintain its value. For example, a home mortgage lender will require the borrower to take out homeowner’s insurance. A lender who issues an auto loan will require some sort of car insurance so if the car is involved in a car accident, the bank can still cover most or all the outstanding loan balance.
Where to Apply for Secured Business Loans?
Although secured loans are easier to get, they are also less common than unsecured loans. Banks, credit unions, and a few online lenders offer secured loans that are backed with CDs, savings account, or a car.
Since secured loans have high borrowing limits, they are a great option if you need large capital for expansion, purchase order financing, or purchasing expensive equipment. if you have a long-term plan for growth and re-investment secured loans may be best for you. Lenders give you more time to repay a secured loan which means more cash to grow your business and low monthly payment. If you have plans to sell your business in the future it is best to pay off loans quickly.
What Are Unsecured Loans?
Unsecured loans are simpler and quicker to process. No collateral is required however this means the risk for the lender is higher. Also, the interest rates are generally higher as well. If you default on your loan, the lender cannot take your property right away. The most common types of unsecured loans are credit cards, student loans, and personal loans. If you get turned down for an unsecured loan, you may still be able to get a secured loan, but you must have collateral to do so.
Lenders will take a look at the following factors when applying for an unsecured loan:
- credit score, employment history, and references
- income and any current debt
- money in savings or investments
- terms of the loan
The advantages of unsecured loans are:
- you may be still be eligible for an unsecured loan even if you do not own property to use as collateral
- the application process is quicker than a secured loan
Examples of unsecured loans include credit cards, personal loans, personal lines of credit, student loans, and some home improvement loans.
Where to Apply for Unsecured Business Loans?
Unsecured loans are available through online lenders, some banks and credit unions. The rates and terms will vary depending on your credit score and income. Many online lenders allow you to pre-qualify without impacting your credit score. Loan amounts may be smaller since the lender does not have any collateral in case you do not make your monthly payments.
Which One is Right for You?
A secured loan may seem more appealing due to its low interest rate and high borrowing limit but sometimes and unsecured loan makes better sense for your business and it may be the only option you have. Loan rates vary and it is important to consider the rate before you choose any type of loan. Also be sure to check your credit report and your credit score before making any decision which can help you make a more informed decision.