Collateral refers to the assets that are offered to guarantee the loan, such as valuable property owned by the applicant. With the use of collateral, the property can be seized if the borrower is unable to pay the loan. Getting approved for a business loan can essentially put property at risk, so it’s important to understand the differences between secured and unsecured business loans and how they work.
What’s the Difference Between Secured and Unsecured Business Loans?
The main difference between secured business loans and unsecured business loans is the use of collateral. Secured loans are guaranteed, so lenders are generally more lenient with terms and requirements; unsecured loans have more restrictions because they are not guaranteed with collateral.
Credit Score
Generally, lenders will conduct a credit check regardless of their requirements; however, secured loans provide leniency with those requirements. An unsecured loan will have more strict standards since the loan relies more on the information in the credit report to make a decision. This credit check may reference your personal or business credit, and sometimes both.
Interest Rates
Secured loans offer lower interest rates because the lender doesn’t consider these loans to be risky. An unsecured loan typically has higher interest rates since the loan is not guaranteed. Secured loans also provide other favorable terms due to the lower risk, such as longer repayment terms and the ability to borrow larger amounts.
Personal Guarantee
A personal guarantee is another way a business loan is approved, and may be required of unsecured loans. It is offered by the individual who is applying for the business loan, and provides a promise that the loan will be repaid using personal assets if needed. This makes the individual personally liable for repaying the loan and puts their personal assets at risk.
Which Is Right for Your Business?
Choosing a loan for your business comes down to the needs of your business and whether you meet the qualifications of the lender. Secured loans can help new businesses that need the funds to cover operational costs. An unsecured loan is a good option for those with good credit or who otherwise meet the requirements of the lender. An unsecured business loan may be the best option for business owners with no collateral or those who don’t want to list their property as collateral on a loan. In general, unsecured business loans include more complex terms, stricter requirements, and may require a personal guarantee.
Secured vs. Unsecured Business Loan Example
You may need to consider all options depending on the length of time in which your business has been operating and the amount of revenue your business is bringing in. For example, a new business likely won’t qualify for an unsecured loan since there are generally specified requirements for the amount of time of being in business. This also applies to new businesses that have not met the revenue requirements. As a new business, you may only qualify for a secured loan at first, but as you grow your business, you can work toward applying for an unsecured loan.
