The Difference Between Secured and Unsecured Business Financing
If your small business needs more cash than can be supplied through business credit lines or personal credit cards, it may be necessary to finance expenses through a loan.
As with any form of financing, debt structure and payment schedule will depend on the bank, your credit history, and your relationship with the lender. Due to these factors (as well as numerous others), you might not be able to receive a loan unless it’s secured.
Before applying, we suggest determining whether you’ll need to pursue a secured or unsecured loan. In this post, we’ll help you decide which option is the best option for your company right now.
What are the Difference Between Secured Business Loans and Unsecured Business Loans?
Secured business loans are the most common and straight-forward kind of lending because they are backed by an asset, such as equipment or real estate. If the borrower defaults, the lender assumes ownership of the property and may try to recoup their loss by selling it.
Pros of Secured Loans
Easier to qualify
For large purchases that you don’t expect to pay off quickly (such as real estate), secured loans may allow you to pay them back over time, up to 30 years.
Since secured loans represent less risk for the lender, there may be some leeway if you accidentally miss a payment or submit it after the deadline.
Cons of Secured Loans
Secured by the value of the asset
Taking out a secured loan means you’re giving the lender legal permission to seize the asset if you can’t make payments according to schedule without a court order.
It could put the future of your business in jeopardy, in addition to your personal finances.
Therefore, you should be careful when putting up collateral. If losing this collateral could cause major financial damages to your livelihood, you should reconsider this financing option.
Unsecured business loans, which aren’t backed by collateral, may be a viable option. However, this type of financing represents more risk to the lender. If the borrower defaults, there is no asset to seize. For this reason, unsecured loans typically come with stringent qualification standards (such as credit score requirements) and higher interest rates. If you default on an unsecured loan, the bank may pursue legal action against you, employ a collection agency, or sell your outstanding debt to a third-party who’ll come after you.
Some unsecured loans require a personal guarantee, which means the lender will be able to appropriate your assets if your business defaults on the loan. This option is best for entrepreneurs who need large amounts of cash quickly and expect to pay it off in a short time.
Pros of Unsecured Loans
There is no asset attached to this loan
You can get funded quicker
In the event your business files for bankruptcy, unsecured loans have the potential to be forgiven.
Cons of Unsecured Loans
This option is typically more expensive and often comes with short repayment periods.
It’s harder to qualify.
Lenders will want to know that your business has been in business for some time, produces strong revenues or positive cash flow
Defaulting on unsecured business loans can mean financial ruin and damaged credit for you and your business, so make sure you’re confident in your business prior to applying.
For new businesses or entrepreneurs who are just starting out, secured business loans may be the only available option. In comparison, for established business owners who are willing to pay higher interest rates, unsecured credit can offer more flexibility, larger amounts and faster access to cash. However, they may be held personally accountable if the business defaults.
To learn more about funding options, Contact us today (201) 663-2438