As a business owner, you must know that small business loans come in different forms to offer numerous opportunities to the companies. But though there are many types of loans, business funding can be classified as either secured or unsecured funding. So, if you require some additional capital to begin or expand your business, you can apply for secured caveat loans and unsecured business loans . Each funding type has its requirements, features, advantages and disadvantages.
As a result, it is crucial to understand the difference between the two before applying for any loan. Knowing these will help you to determine which option best fits your needs. So, today, we will discuss these two types of loans to learn about their differences. We have noted down below some explanations of both secured and unsecured loans that will help you determine the best loan type before approaching any business lenders.
Collateral Requirements
Collateral or asset can be used to secure business loans, you can use property as security for caveat loans or vehicles & machinery or equipment for other funding types. If you apply for any secured loan, you have to offer collateral as a security to the lenders so that they can get their money back from it if you default on the repayment.
However, if you are applying for an unsecured business loan, you do not need to offer assets. As a result, no assets are at risk to secure the business loan. However getting an unsecured loan is not as simple as obtaining a secured one as the business lenders verify your creditworthiness before approving your application.
Qualification
Getting access to capital from secured loans is much simpler than unsecured ones. While applying for unsecured loans, many business lenders will consider your application if you have been running your business for at least six months with an excellent monthly turnover. Hence, the eligibility criteria for unsecured loans are much more complicated.
But as you can offer your collateral for secured loans, private lenders do not have strict eligibility criteria. However, if you take out such loans from traditional banks, they have complicated criteria. They will consider your business type, credit history, annual turnover, and other things before approving your loan application.
Application
There will be a time when you need some urgent cash to operate your business or manage your financial issues. In such cases, nothing is better than opting for either secured or unsecured loans, as you can access capital within 24 hours.
However if you want to take out a business loan on the property in the form of a secured loan from a traditional lender such as a bank, the time frame can be a lot longer. They will verify several things before giving you the capital. As a result, you need to wait for a long time. It could be an extra burden for your business if you need the funding quickly.
Flexibility
Unsecured loans are a much more flexible funding option for businesses, especially the small ones. This is because as a business owner and borrower of unsecured loans, you will get control to choose the loan amount you want or require. Some lenders also offer you flexible loan terms and an easy repayment schedule.
However you may not get such flexibility if you take out secured loans. Some lenders of secured loans might charge a penalty fee if you repay the entire loan amount with interest early.
Loan Amount
As discussed above, you may get more control over the loan amount you want to borrow with unsecured loans. When you approach a business lender of unsecured loans, you can negotiate the amount depending on your requirement. Due to this, you can also get sufficient capital with an affordable interest rate due to the flexibility of unsecured business finance.
On the other hand, though you can negotiate with the lenders of secured loans, you can still get a decent amount of money as you have to put your collateral as security for the loan. Since the lenders have less risk and can take possession of your asset if you default on the loan, they will allow you to borrow more than on an unsecured basis. However the interest rate is a bit higher for unsecured loans. But again, if you take out a business loan on the property, you will get up to 75% of the property value as the loan amount.
Borrowing Limit
If your business needs a higher loan amount, you should go for a secured loan, as you will get more capital because of the collateral you submit. However, if you have a good credit score and financial history, you can obtain a decent amount of capital from unsecured loans. If you have sufficient turnover in your business you may be able to borrow a larger sum of money.
Loan Term
Apart from the above, secured and unsecured business loans also vary in loan terms. Secured loans carry longer terms ranging from 1 month to up to 30 years with traditional lenders. However, if you take out an unsecured business loan, you must repay the total amount with applicable interest and other fees within 3 to 18 months. Shorter loan terms are an advantage for the borrower. A shorter repayment term enables you to repay the loan quickly, and as a result, you can save a significant amount of interest costs.
Wrapping It Up
In the end, we hope you have got all the information regarding secured and unsecured loan types. Now, you can determine whether you can opt for a business loan on the property or an unsecured options. Hence, consider all the above differences, understand your business requirements, and select between secured or unsecured loans to grow your dream venture and operate it successfully.
