When looking for finance for your business there are two main types of business loans to decide upon, a secured or an unsecured business loan. This article will explain the difference between the two so you can gain a better understanding of the two types and determine what will suit your circumstances better.
The primary difference between these two types of loans is the security. A secured business loan uses business assets, vehicles, property etc. as collateral for the loan. This is considered low risk by the lender as they have assurance for the loan. An unsecured loan doesn’t require security but usually has stricter eligibility criteria due to the high risk factor on the lenders side.
Secured business loans:
A secured business loan is a credit agreement that uses asset/s as collateral against the loan. It’s usually of equal or greater value than the loan itself. This is considered lower risk to the lender as they have security against the loan as a guarantee. This provides assurance that they will get their money back if the loan isn’t repaid. As a result, lenders usually tend to offer larger loan amounts and usually with a lower interest rate and longer repayment options.
Secured loans are best suited to:
– People with a less desirable credit history
– People that have assets to use as collateral
– People who want to purchase a start-up business
– If you are wanting to borrow a large amount over a longer period of time
Unsecured business loans:
An unsecured business loan does not require any security but relies heavily on the borrower’s credit history and their business’s financial stability. Unsecured business loans are usually considered a higher risk to lenders. This means the loan amount and loan term are often lower and you will receive higher interest rates. Unsecured business loans look at many factors including previous debt repayment history, business turnover, overall business performance, credit history etc.
Unsecured loans are best suited to:
– Small to medium businesses with not much assets
– people who have an established business
– places that have a good turnover and solid financials
– People that can make repayments over a short time
– Have a good credit history.
If you choose a secured loan and use assets as security, you will most probably get a better rate, a longer loan term and also a larger loan amount. If you have nothing to use as security then an unsecured loan is the best option as long as your financials are in order and credit file is good.