For most entrepreneurs, acquiring a loan gives them the financial head start they need to build and grow their businesses. Several types of loans are available for business owners. Each one has its own benefits and disadvantages, but not all of them are right for all companies. A couple of broad categories are secured and unsecured loans. Knowing the differences and advantages of each can help you choose the right one to help your business succeed.
Collateral
One of the biggest differences between secured and unsecured loans is the need for collateral. With a secured loan, you’ll need to promise a lender some type of asset to back the money you borrow. That might be your business or even your home. Collateral gives lenders reassurance that they’ll have a certain amount of protection to reduce their losses if you don’t repay your loan as promised.
With an unsecured loan, you don’t have to provide collateral. You’re borrowing money based on your word that you’ll pay it back. If you ultimately can’t pay back the loan, the lender can’t take your business, home, or other assets to recoup its losses. That means there’s less risk for you, but because it poses more risks for the lender, you may have to make certain sacrifices in exchange for the added security.
Interest Rates
Interest rates also tend to vary between secured and unsecured loans. They’re likely to be higher for an unsecured Business Loan than for one that’s backed by collateral since there’s more risk involved for the lender. That means the loan will cost you more over the long term. For business owners who don’t want to risk offering up their assets as collateral or have no assets to offer, though, those higher interest rates are considered acceptable expenses.
Loan Amounts
In many cases, the amount of money business owners are able to borrow varies between secured and unsecured loans as well. It’s often possible to borrow more money if you provide collateral than if you borrow on your promise alone. That being said, there are lenders out there that provide perfectly adequate loans for businesses even without collateral. Think about how much money you need to start, expand, or improve your business, and look for loans that can accommodate.
Eligibility
Acquiring a secured loan is often easier than obtaining an unsecured one. That’s especially true for entrepreneurs who have low credit scores or little to no borrowing history. If you fall into that category, lenders may see you as a high-risk borrower. Of course, some lenders specialize in working with people who have experienced credit issues in the past. Though they have certain prerequisites in place for potential borrowers, they’re still willing to give them a fair chance.
Choosing the Right Business Loan for You
Both secured and unsecured business loans have their strong suits and drawbacks, but what’s considered a downside for one borrower might be a major advantage for another. Consider the points mentioned here to help you decide which option best meets your needs. From there, finding the right lender to work with can help you maximize your borrowing power to build or grow your business.
