When you need to borrow money for your business, there are two types of loans – secured and unsecured business loans that you can avail of.
If you are all set to avail of an instant business loan for your business’s needs and can’t decide whether to go for a secured or unsecured business loan, this post is for you.
Each loan comes with its share of advantages or disadvantages, and even business loans are no exceptions. As a result, when you make up your mind to avail a loan, it becomes to know the differences between secured and unsecured ones.
Knowing the differences inside out keeps you better positioned to seek one as per your needs and repayment capacity.
Let’s provide you some insights on secured and unsecured business loans so that you can make a good decision if you have a business loan to apply for.
What are secured business loans?
Compared to an unsecured business loan, ais different as the borrower needs to provide some collateral, guarantor, or security. The lender utilizes the collateral in case if you fail to make repayments on time.
Collateral is something that a borrower can put down as a security for the loan’s repayment purpose for business. You are free to keep your home, investments, car, and other assets that could be liquidated as collateral.
A secured loan for business also has a provision for a lower business loan interest rate compared to the unsecured one. Since you have already provided security while availing of the secured business loan, the lender also rewards you with a lower business loan interest rate.
Also, availing of a secured business loan is faster to get with speedy approvals because of the collateral. They are super-easy to get, and the loan’s purpose gets served as they pose a smaller risk for the lender. Why? It’s because you have already provided collateral to assure lenders.
One of the most important things while applying for a secured business loan is that you should only provide collateral that you can afford to lose. Yes, you never know what may happen tomorrow, and you may not be able to repay the loan.
In such cases, the lender will surely seize the collateral and use it to cover its loss. Thus, it would be better to offer collateral that is of little importance.
It would also be prudent to get the collateral’s real value before availing of a loan so that you are aware of its value and not get cheated later.
Be informed that lenders always give lower values to collateral because they need to liquidate it quickly. To do so, they sell the security at a lower price. Thus, when you have recently analyzed your collateral’s real worth, you can also convince the lender that it contains a value.
What are unsecured business loans?
An unsecured business loan is a facility where you don’t need collateral while availing the loan. You get such a loan after proving your eligibility with your credit score, repayment history, and other factors.
As a result, the interest rate for such a loan is always higher than a secured business loan type. Why? Since there is no collateral involved compared to a secured loan, the rate of risk for such loans is higher. Hence, lenders charge a higher rate to compensate for a loss.
Sometimes, the interest rate on ancould be even higher than that of a credit card. The only respite for borrowers is that the interest rate is fixed, and you can pay a fixed EMI leading to easy repayment.
Also, the tenor for an unsecured business loan is shorter than secured ones as the lenders want their money to be back soon as it lessens their risks. It is one of the reasons more secured business loans are approved than unsecured business loans.
The Bottom Line
Since you are aware of the features, advantages, and disadvantages of secured and unsecured business loans, you would apply for one as per your needs.