What is the difference between Secured and Unsecured Business loan?
Every successful business starts with a simple idea – an idea that, if implemented, could help make life just a little bit easier for aspiring entrepreneurs around the world. Usually, the beta stage of such businesses is funded by simply borrowing from friends or using their own savings.
But, it’s the next stage that becomes a make-or-break for many – expanding on the original idea either through volume growth or by developing newer version of the original product. This is where business loans can inject a dose of adrenaline into your startup.
A quick overview
As the name suggests, a business loan is a loan intended specifically for business purposes, which the borrower then repays with interest. For a growing business, there are a range of loan products available that can help you to:
- Expand your business – maybe open a new office at a different location.
- Launch newer versions of your product and assist in marketing campaigns.
- Purchase expensive equipment or machinery.
- Handle day-to-day expenses during lean times, and more.
Business Loans can be secured or unsecured depending on the nature of your agreement with the lender. Let us look further into this.
What are secured loans?
Secured loans are among the most common loans that you will find in the marketplace.
- They have a collateral attached to them, which means that they are backed by some asset that you provide. The assets could be in the form of cash, real estate, inventory, unpaid invoices and more.
- The collateral provides your lender a recovery option in the event that you default on the business loan for new business, thus reducing the risk factor in lending.
- This also benefits the borrower, since lenders feel safer loaning higher amounts at lower rates of interest. Typical tenures for secured loans are also higher for the same reason.
- Of course, your asset is essentially owned by the lender until your loan amount is completely repaid. This could put your personal future in jeopardy in the event that you are unable to make payments.
What are unsecured loans?
As the name suggests, unsecured business loans do not require the backing of any asset from your end, thus transferring a significant part of the risk to the lender.
- So, why would a lender consider lending you money? Well, their decisions are based purely on your credit worthiness and the financial health of your business.
- Traditionally, unsecured loans have a smaller tenure and higher interest rates. The amount of money you can borrow is also lesser than what you could borrow with a secured loan.
- These loans are the best option for those with excellent credit history looking to get a large amount of cash in a short period of time. These loans have distinctly shorter approval cycles, since there is no appraisal process involved.
- While it seems that there is no asset that the lender can seize, defaulting on an unsecured loan can ruin your credit history for a really long time, thus landing all of your future business dealings in jeopardy.
To conclude, if you are a new business owner, a secured business loan should be the preferred route for you. For an experienced entrepreneur who has a stable business, but is looking to expand, an unsecured loan can do wonders for both your credit history and your business. Unsecured online business loans have become all the rage now, with their quick approval cycles that provide you access to cash within just 48 hours.