Secured vs unsecured business loan. Which is a better option for your business?

A small credit is just not enough to set up a business. If you need the best small business loans, then there are lenders with whom you can get the best interest rates with very quick approval of your business loan.

There is a lot to consider before taking up a business loan and the first thing to look for is should we take up secured or unsecured business loans.

We will get this explained for you and make it easy for you to get the right option for your business.

Secured business loan

Secured loans are just a secured loan type. This loan is backed by an asset or property that is related to the business, which includes equipment or land. If in case, you have missed out few payments or haven’t paid for a very long time then the asset pledged as collateral will be taken over by the lender. They will have all the legal rights in taking up the ownership of the property.

There are different types of collaterals that are used for a secured loan:

• Blanket lien
• Business or personal property
• Business savings accounts
• Home equity
• Business property like machinery or specialized equipment
• Business or personal vehicle
• Farm assets and products
• Investment accounts
• Accounts receivable
• Inventory
• Natural reserves
• Insurance policies
• Paper investments
• Such valuables as fine art, jewellery.

If the business owner has put up an asset as a collateral, then there are chances to get the loan with low-interest rates and a longer payment period.

Pros of Secured loans

• Easy approval: The loan approval for secured loans is very easy. Even if you don’t have a good credit score, still you are pledging something more valuable enough to pay back the loan amount if in case you couldn’t make the payments.
• Lower interest rates: Secured loans are generally charged with low-interest rates as the pledging of an asset will bring down the risk of the lender.
• Negotiation is easy: As you, as a borrower will put an asset with the lender, there are chances to negotiate with the lender on the loan amount or on the interest rates.

Cons of secured loans

• Repossession of the asset: If you have defaulted a few payments then this means you have risked your asset, as you might lose the asset. it would be a worse situation if the asset that you have placed as an asset is seized by the lender. You need to be careful before applying and should also make the payments on time.                                          
• Longer-term period: A longer repayment period can sound like a good advantage if you want to lower your monthly expenses. However, it also means paying more interest in the whole loan period.

Now that you know everything about a secured loan, we will look at the unsecured business loan type.

Unsecured business loan

If you have a good credit score, then taking an unsecured loan would be the best option as there is no requirement of pledging an asset and the loan will be easily approved because of the good credit score. This loan type has more risks to the lender because if you default a payment then there is no asset to seize to cover the losses.

Pros of Unsecured loan

• Less risky: You don’t have to put an asset as collateral which means there is less risk involved. Even if you miss out a few payments then the lenders will not have a chance to seize any asset.
• Reasonable interest rates: Generally borrowers apply for this loan if the credit score is high, this means the interest rate charged will be low but due to the reason that there is no asset being placed and the risk is more to the lender, they might charge reasonable interest rates.

Cons of Unsecured loan

• Less borrowings: The borrowings of the loan amount could be less when compared to the secured loan type. The lender will grant for less amount because it is not backed by an asset.
• High-interest rates: High-interest rates are charged if you are having not so good credit score and there is also no requirement of the asset to place as surety. Reasonable interest rate is charged if you have a good credit score.
• Hard to qualify: The lender will look at so many things before considering the loan amount, even if one thing is missing, the application will be stopped for verification.

Now that you know about these two different business loans, choose one according to the business that you have set up. Take up these loans only if you feel that you can repay back the money on time.