When getting a loan to set up or expanding a business, you’ll need to choose between a secured and unsecured business loan. Here’s what you need to know beforehand.
What is a secured business loan?
The financial provider often assesses a secured loan before it’s approved. This gives the lender some security in missed repayments or failure to repay, such as seizing some asset.
For example, if a business were to borrow money, the business could then offer the lender their property or machinery as security. So, if they were to miss the repayments, then these assets could be seized as compensation.
As for the lender, a contract would be signed between the both of you and include clauses regarding this security and detailing which previously agreed assets could be used as collateral if needs be.
Pros and cons
With secured business loans you can apply for much higher amounts of money than you would with an unsecured loan. You also don’t have to worry too much about your credit score as there’s something in place for the lenders if you can’t make the repayments. These loans can often be paid back over a longer period, too.
However, the security of the loan can be sold on by the borrower if you become unable to pay. You might also need a guarantor if your assets are deemed insufficient by the lender.
What is an unsecured business loan?
If a business doesn’t have access to the assets or doesn’t want to put their property or assets on the line, there’s an option to apply for an unsecured loan. This means that the business can access some finances without any need for security.
Often, these types of loans are usually for smaller amounts of money and can carry much higher interest rates. They also need someone with a strong credit score to obtain them, due to the lenders relying on your track record to prove that you can keep up with the repayments.
Pros and cons
Unsecured loans are often more widely available than secured loans as they are often supplied in smaller amounts. These loans are great for start-up businesses and those that don’t have assets to secure a loan, such as businesses that rent their machinery.
However, these loans can be expensive to pay back in terms of interest and usually require a business with a very good credit score to combat these high-interest rates.
