There are two basic kinds of business loans that could help you raise your business capital. Discover the key differences between them to decide which one is best for your needs.
These brands have so many things in common.
And one of them is the fact that they were all built by their owners using business loans.
So, if your business ends up needing more money than what you can raise through a line of credit…
May it be to expand to a new location or just to meet next month’s payroll…
Taking out a loan might just be the way to go.
But before you sign on that dotted line, make sure you’ve done your due diligence. After all, not all business loans are created equal.
For starters, you should be familiar with the two basic types of bank loans:
Secured business loans and unsecured business loans.
In this article, we’ll explain four key differences to distinguish secured loan vs unsecured loan. This can help you decide which business loan is right for you.
Secured Loan vs Unsecured Loan: 4 Key Differences
It doesn’t matter who you are and what industry you’re in.
If you ask us to choose which between these two types of loans is better for you, there will only be one answer:
The type of loan you should get depends on your asset profile, your risk appetite, and the loan repayment structure you’re eyeing.
As such, it’s crucial to take note of the key differences between secured and unsecured loans so you can assess the variables yourself.
Difference #1: Need for Collateral
The most important factor in distinguishing secured loan vs unsecured loan is the need for collateral.
Secured loans are called such because they’re backed up with some kind of security that’s typically called a collateral.
A collateral is something you pledge to signify your intent to pay back the loan in good faith. Your collateral may come in the form of a pre-existing property. Or even the exact property or equipment you’re purchasing with the proceeds from your secured loan.
In the event that you default on the loan, the lender will claim ownership of your collateral to cover for the money you haven’t paid. Bear in mind that this happens automatically and without the need for a court order.
On the other hand, unsecured business loans do not require you to put up anything as collateral. This means you won’t be at risk of having your assets seized if you end up defaulting on the loan.
Still, this is without prejudice to any legal action the bank may pursue against you if you do default on an unsecured loan. They may hire a collection agency, ask the court to seize your assets anyway, or even sell your outstanding debt to a third party.
In any case, it is the lender that takes on a bigger risk of not getting paid back when they offer unsecured loans. So, the lender will undoubtedly try to make up for this higher risk by charging higher rates on the loan, which provides its own kind of protection.
And that brings us to our next point…
Difference #2: Interest Rates
Since secured business loans burden lenders with lower risk of default, they are usually offered at lower interest rates.
Conversely, unsecured loans typically come with higher interest rates. Not to mention a much stricter application process.
For some entrepreneurs, the higher interest rate is a red flag.
Indeed, this is a major drawback that might make you think twice about unsecured business loans.
But there may be instances where you’re more concerned about keeping your assets intact while you weather a storm Which is why you might be fine with paying a higher interest rate on the loan.
Difference #3: Maximum Loan Amount
Many business owners think they can get bigger loan amounts on secured loans compared to unsecured loans. That assumption might generally hold true, but it’s not always as simple as that.
It’s true that lenders are typically more inclined to let you borrow more if you’ll put up your assets as security for the loan. But the loan amount will still depend on the value and nature of the property or other asset you’ll be offering as collateral.
So, if you want to borrow more than any of your assets’ worth, you might have a better chance with an unsecured loan. Provided that you have a rock-solid credit rating.
Still, you’ve got to manage your expectations when it comes to the maximum loan amount you can get from an unsecured loan.
Difference #4: Repayment Periods
Another typical drawback of unsecured loans is that they come with shorter repayment periods compared to secured business loans.
On the other hand, secured loans will normally afford you longer repayment terms. Whether you consider this an advantage or a disadvantage depends on your priorities. After all, having longer repayment terms means you will be in debt longer.
Bear in mind that you can’t just cut short the tenor you are given on a loan…
…at least without paying a hefty fee.
Apply for an Unsecured Business Loan Today
In our experience, many businesses—both small and big—find value in taking out unsecured loans.
For smaller, newer businesses, it is a way to get access to more business capital even without any assets that can be offered as collateral.
On the other hand, established businesses are not always keen on putting their headquarters or family homes at risk of getting seized.
In both these scenarios, taking out an unsecured business loan will be the best option.
If you are in a similar position where you don’t have a large asset pool for a secured loan…
We at Unsecured Finance Australia can help by offering the best unsecured loans for your business.
Apply online and get approval within the next 24 hours!