What is difference between secured and unsecured business loan.

Posted by Digital on July 5th, 2018

What is the difference between secured and unsecured business loan?

Raising money for a new business can be a challenge. There are lots of funding options for a small business, and getting a loan is a good choice for many startups. There are several loan types to choose from, and one of the main decisions is deciding between a secured or an unsecured business loan.

Secured  Loans

Secured business loans are the most common and straight-forward kind of lending because they are backed by a collateral, such as equipment or real estate. If the borrower defaults, the lender assumes ownership of the property and may try to recover their loss by selling it. Types of collateral that may be pledged for a loan include personal cash and property, unpaid invoices, inventory and even a lien on your business.

Business owners may opt for this option if they want to limit their personal risk in the investment, or want lower interest rates and the ability to pay back the investment over longer periods of time.

Unsecured Loans

For business owners with strong personal credit, unsecured business loans, which are not backed by collateral, may be an 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 and higher interest rates. Banks may also require a different security feature as an alternative to collateral – such as a percentage of your credit card transactions.

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 will come after you. Some unsecured loans require a personal guarantee, which means banks 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.

Conclusion: Secured vs. Unsecured Loan

For new businesses who are just starting out, a secured business loan may be the only option available. For established business owners 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.