The Difference between Secured and Unsecured Business Loans

If your business needs more cash than you can generate, you might need to take a business loan. However, you need to be well-informed about loans. Debt structure and payment schedule often depend on your credit history, the lender, and your relationship with the lender. Due to these factors, you may or may not be able to receive a secured loan. Here is the difference between secured and unsecured loans and how to choose the best option for you.

Definition of Secured Loans

Secured business loans are the most straightforward lending options available because a person or a business asset backs them as collateral. If the borrower doesn’t pay, the lender owns the collateral, which may be sold out to recoup the money. The assets that can be used to secure these loans include unpaid invoices, inventory, equipment, real estate, and cash, among others.

Pros of Secured Loans

Since the lender is holding something against you, the interest rates of the loans are usually lower. If your collateral is something as big as real estate, you may be allowed to pay the mortgage for as long as 30 years. Therefore, if you are looking for business loans that have lower interest and long loan terms, then secured loans are your best option.

Cons

Since the lender has legal permission to seize your asset if you don’t pay, you may face significant financial damages.

Definition of Unsecured Loans

Unsecured loans are credit financing options where the borrower does not have to provide collateral to qualify for a cash advance. Business owners who have a high credit score benefit significantly from these loans.

Pros of Unsecured Loans

Since you don’t put any collateral, your chances of experiencing financial damage due to confiscated assets are low. Also, unsecured loans can be written off in the event your company files for bankruptcy.

Cons

Since the lenders are at a higher risk of losing money, they typically charge high interest rates. Moreover, the repayment period is usually short, and most small business owners cannot afford it. Banks that offer unsecured loans may take a percentage of your credit card transaction as their way of compensating risks. This means that it is expensive to manage an unsecured business loan.

If you are a small business owner who wants to keep your business going, secured loans are the best for you. However, if you are an established business owner who needs quick access to cash and you are willing to pay high interest rates within a short time, then you should get an unsecured business loan.

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