Whether you are trying to establish your own business and require an initial fund to buy equipments or are a seasoned business professional in need of temporary financing, you must be having a hard time to decide what type of business loan to go after.
You might think that the idea of getting an unsecured loan is all absurd and a made-up thing, but in reality banks do fund businesses without “collateral”. But of course, just like everything else, this too comes with its share of “ifs and buts”. So, before applying for a loan, it is highly recommended that you educate yourself about both secured as well as unsecured loan options and understand the difference between them. This way you will be in a better situation to recognise which type works best for your business requirements.
Let’s go through the differences between secured and unsecured commercial loans to help you make a wise decision:
Secured Loans
A secured loan refers to a loan in which the lending agency secures their interest against some asset of the borrower. If in any case you are not able to fulfil your obligation of paying back the amount, then the lender can seize the pledged collateral and sell it over in order to recover the outstanding liability (debt).
From a lender’s perspective a secured loan is far less risky as they have some sort of security (if things go awry). In return, the borrower will enjoy lower interest rates and longer repayment terms along with easy approval.
Unsecured Loans
Unlike secured loans, unsecured business loans refer to a monetary loan that is not secured against any asset. Here the lending agency relies entirely on the good credit history of the borrower (both personal as well as business credit) along with his financial strength.
As these loans are riskier to the lending agencies, the loan amounts usually tend to be smaller and the approval process takes longer. Not just that, even the interest rates is much higher.
Let’s see how the two business finances differ:
- Interest Rates
As there is no collateral involved, the interest rate for unsecured loan is far higher than that for secured business loans. One should always think before getting an unsecured loan as to how easy it would be to pay such a heavy interest.
- Approval Process
When unsecured loans are involved, the banks carry out even thorough checks to ensure that the borrower is capable enough to repay the amount. So the approval process is lengthy and tedious.
- Credit History
Because the unsecured business finances are based entirely the borrower’s credit, his personal as well as business accounts are on scrutiny. The banks often go over the borrower’s balance sheet with a fine tooth comb to ensure they do not miss anything.
Now that you are well aware of the differences between secured and unsecured business finances, you must take a moment to decide which type of loan will meet your requirements in the best possible way. Also, if possible then go through your credit report and work towards correcting your mistakes before you apply for a business loan (especially unsecured one).