- Posted by: Administrator
- Category: Finance
To the average business owner, it can seem like there’s a nearly endless array of options for small business loans. The terms and options can get a little overwhelming, but if you really boil it down, most options for small business funding can fall into one of a few different categories.
Two of the most common classifications of business loans are secured and unsecured. If you’ve been in business for any appreciable amount of time you’ve likely seen these terms before, but we know they can get a little overwhelming when you’re looking for funding, and learning the advantages and uses of each can make all the difference when you have to pick your next business loan.
The Difference Between Secured and Unsecured Business Loans
The biggest difference between the two of them lies in the name: secured business loans require collateral to the bank or lending entity, whereas unsecured business loans are any loan made to a business without collateral.
Collateral, as you’re probably aware, is anything your business owns or possesses that’s considered of equal value to the amount of the loan, generally given to provide security and incentive for you to pay the loan back (hence the name ‘secured’).
Each of these loans are applicable to different situations and can satisfy different needs at different times. Before deciding on which type of funding is best for you, ask yourself a few questions about your business to help you decide:
What collateral do I have to spare?
Many lending agencies are more prone to giving out secured business loans, as they have a greater assurance that the amount of the loan will be paid back.
If your business has anything of value that you can put up for collateral, you run the risk of losing it if you’re unable to pay back your loan but you also greatly increase your chances of the loan actually going through. It’s a good way to make getting your loan more of a ‘sure thing’ if you have collateral to offer.
How is my credit/my business’ credit?
No judgment here, but there’s a lot of people out there who might not have the sort of A+ credit that banks like to see that still own a business and need extra financing. Secured loans tend to be easier to get if your credit score is less than perfect due to the collateral involved, but it isn’t a guarantee either way – better to weigh your options when able.
How much time do I have to get the money I need?
Not every business expense has the luxury of being easily foreseen or telegraphed, and sometimes business funding needs can crop up with extremely short notice.
Unsecured loans tend to be approved and provided faster due to the lender not having to review your collateral or anything, and even if you’re approved for a smaller amount than you might have been with a secured loan the turn around time can make all the difference in the world sometimes.
Can I afford to pay the loan back?
Granted, this is a question you should always be asking yourself, but it particularly applies when deciding what type of loan you’re getting. Secured loans, by nature, will always have to be more strict about their repayment terms and schedule, whereas unsecured loans (generally speaking) can afford to be more lax or favorable in their repayment terms.
Before taking on any extra business debt, however, it’s important to consider your ability to repay the loan, and on what terms you’ll be able to.