When it comes to securing financing for your business, there are many options to choose from, typically the types of business loans will fall under 1 of 2 umbrellas, secured loans and unsecured loans.
See below the key differences between unsecured and secured business loans, helping you determine which option is best suited for your business.
Unsecured business loans
Unsecured business loans are a type of financing that does not require a business to have any assets or property to use as security, also known as collateral. Instead, lenders approve these loans based on the borrower's creditworthiness and financial history. Here are some key features of unsecured business loans:
- No collateral required
Unsecured business loans don’t require collateral to secure the loan against. This can be a major advantage for businesses that lack valuable assets to put up as security.
- Faster approval
Since the loan approval process relies heavily on factors that can be assessed quickly, such as your business’ creditworthiness and financial health, unsecured loans typically have quicker approval times compared to secured loans.
- Higher interest rates
To compensate for the higher risk they assume, lenders tend to charge higher interest rates on unsecured loans compared to secured loans.
- Smaller loan amounts
Unsecured loans typically offer smaller loan amounts compared to secured loans, which can limit your ability to fund large projects.
Secured business loans
Secured business loans, on the other hand, require borrowers to provide collateral, which the lender can seize in case of default. Here are some key features of secured business loans:
- Collateral required
To get a secured business loan, you must have assets of value such as property, machinery, equipment or vehicles.
- Lower interest rates
Since secured loans are less risky for lenders as they will be able to recoup funds from the assets in case of default, they usually come with lower interest rates compared to unsecured loans.
- Higher loan amounts
Secured loans often offer higher loan amounts, making them a preferred choice for businesses with substantial financing needs.
- Longer repayment terms
Secured business loans typically have longer repayment terms, allowing for smaller monthly payments and more flexibility in managing cash flow.
- Asset risk
If you default on a secured loan, the lender can seize and sell the collateral to recover their losses, potentially putting your assets at risk. You’ll need to carefully consider if you're confident your business will be able to fully repay the loan, or you could lose an asset if unable to pay.
Choosing the right option for your business
The decision between unsecured and secured business loans depends on various factors unique to your business's financial situation and goals. Here are some considerations to help you make the right choice:
The strength of your business credit score
If you have a good business credit score and can qualify for an unsecured loan, it may be a suitable option, especially for smaller financing needs.
Loan size
Consider the amount of financing you require. For larger amounts, beyond what you might be eligible for with an unsecured loan, a secured loan may be the only viable option.
Asset availability
Assess the assets your business can use as security. If you have valuable assets and are comfortable with the risk, a secured loan may offer better terms.
Risk tolerance
Evaluate your tolerance for risk. Unsecured loans carry a higher risk of personal and business assets not being at stake, but they often come with higher interest rates.
Purpose of the loan
Consider the reason why you need funding. If it's for a short-term cash flow gap, or a specific project, an unsecured loan might be more suitable. For long-term investments or large-scale expansions, a secured loan might be a better fit.
To better understand the potential costs and repayments associated with each type of loan, consider calculating business loans with our dedicated business loan calculator. This tool can help you visualize the financial implications of different loan options and assist you in making a more informed decision.
You could also speak with a specialist to make an informed decision that will support the growth and success of your business. When you search for funding with Capitalise, we’ll provide you with dedicated support from a funding specialist who can help you find the right option for your business.
