When you apply next apply for a business loan, you’ll be presented with a choice between two options: secured or unsecured. A decision you shouldn’t take lightly, after it all it could have huge ramifications for you and your enterprise. Fortunately for you, we’ve weighed the two financial agreements against one another to lessen the burden, as we attempt to answer the question of which is best, secured or unsecured business loans.
Before you even consider sending off an application for a business loan, you first need to understand the difference between the two.
What Is a Secured Loan?
A secured loan uses a borrower’s personal or commercial property as collateral. This means should they ever fall behind with their payments the said assets will be seized by the lender and sold on to pay off any remaining debt.
Due to the fact that the lender knows they will receive some form of payment for their loan, the value of a secured loan tends to be quite high while interest rates are also relatively low.
What Is an Unsecured Loan?
An unsecured loan instead uses a business’s financial history to judge whether it qualifies for a loan. No collateral is required; a lender will alternatively ask to see a clean bill of credit and a prospective revenue report, to assure them of a company’s ability to repay loans.
Even with the documents legitimising a company’s financial stability, unsecured loans are still a relatively risky venture for lenders, for this reason interest rates are significantly higher.
Pros & Cons:
Now that we know what each of the loans entails, let’s take a look at the benefits and negatives of each.
The Benefits Of A Secured Loan
The first benefit of secured loans is the fact they are often more lucrative than unsecured financial agreements, which means they’re perfect for businesses in need of a large capital injection so that they can expand.
Another pro, is that thanks to the insurance of physical collateral, lenders tend to give you far longer to repay a secured loan, allowing businesses to implement a long term plan for growth and re-investment, not feeling pressured to pay off their debts.
Also the extended time permitted to pay off secured loans, means that businesses can often minimise the monthly payments coming out of their account thus freeing up cash which can be used more effectively elsewhere.
The Disadvantages of Secured Loans
The most obvious drawback of secured loans is the risk of losing personal assets, especially when it’s your home, after just one or two payments defaulting or being missed your property could well be in jeopardy of being foreclosed.
Also when you apply for a secured loan, you will often be required to pay some kind of upfront arrangement fee for your lender.
The application process can become quite tiresome as well, you’ll have to present a series of documents clarifying that you own the assets you want to use for your collateral, which then have to be vetted and authenticated by your respective lender, a process which can take weeks to complete.
The Benefits Of Unsecured Loan
Unsecured loans have a variety of benefits that make them very useful for a multitude of businesses not least the fact that should a repayment default, a business won’t lose any form of personal property, instead the worse they’ll incur is an additional levy to their loan’s original value.
The second positive of choosing an unsecured loan for your business is that the process for approving your applications is so much quicker. You won’t have to register any form of assets with your lender which cuts down the waiting time for a loan significantly.
Unsecured arrangements also allow you take out smaller loans, so SME’s are therefore able to borrow an amount that relates to the size of their business, opposed to if they chose a secured loan, which sometimes have unreasonably high minimum prices.
The Disadvantages of Unsecured Loans
Although approvals are quicker, they are few less common due to the fact that unsecured loans are a much riskier venture for lenders, therefore criteria for a successful application is much more stringent.
If your business doesn’t have positive trading records and a good credit rating, then it’s likely you’ll fail in your application for an unsecured loan.
The business owner’s credit record may also be checked, particularly if an SME is applying for the loan, as their personal history in repaying loans will likely be indicative of their company’s ability to do so.
So there you have it, secured pitted against unsecured loans. We hope that this guide has gone some way to helping you understand which is best for you and your business.