When the need to borrow money comes up, there are many choices to choose from, including borrowing from family, a cash advance on a credit card, or a traditional loan from a bank. There are two types of business loans to get from the bank: secured and unsecured.
If you need funding for your new startup you probably have questions about secured and unsecured business loans. Each type of loan has its own requirements, as well as advantages and disadvantages.
When you apply for a loan, it’s important to know the difference between the two. You need to see which loan fits your needs best. Below are explanations of both secured and unsecured business loans. Make sure you go with the one that fits your needs best.
Secured Business Loans
Secured business loans are different from unsecured business loans because you need to offer some type of collateral to the lender in case you default on your payments for the loan. Basically, collateral is something that you can pledge as a security for repayment of a loan. Some examples of collateral include a home, a car, investments, or other assets that can be liquidated.
Because the loan is “secured”, interest rates are usually lower on secured business loans. They are also easier to get because they pose a smaller risk for the bank.
If you apply for a secured loan, make sure the assets that you put up for collateral are something that you are willing to lose. There is always a chance that you may default and you will lose everything you put up as collateral. Also, make sure that you get an accurate estimate of your collateral’s value before you speak with a lender.
Lenders usually give lower values to collateral because they have to liquidate the collateral very quickly. In order to do so, they sell the collateral at very low prices. So, if you have a more recent assessment estimate of what your collateral is worth, you can more easily persuade your lender that your item has value.
Unsecured Business Loans
Unsecured loans are given without any kind of collateral from the buyer. They are made on the basis of your credit rating and other methods to determine your creditworthiness. Because these risks are unsecured and there is no collateral, there is a greater risk for the lender. Because of this, they usually have higher interest rates than secured loans and they are also harder to obtain than secured loans. Keep in mind that sometimes the interest rates on unsecured business loans can be higher than the interest rates on your credit card. Usually, the interest rate for this type of loan is fixed but it is possible to have an unsecured loan with a variable interest rate. Regardless, the unsecured business loan will always be higher than the secured business loan.
It is also important to note that the term of an unsecured business loan is shorter than the term of a secured business loan. When there is no collateral to reduce the bank’s risk, the bank wants the money to be paid back as soon as possible. This is to lessen the risk of the bank. This is also the reason why there are more secured business loans given out than unsecured loans. Secured business loans provide less risk for financial institutions.
Furthermore, most lenders require that you have a great credit rating and that you have been in business for at least two years. Basically, the unsecured business loan works best for established business borrowers with an excellent credit history. They are not good for startup companies or people with not-so-great credit ratings.
Tax Benefits of Secured Business Loans
When you have a secured loan, it is possible to write-off interest that is associated with the loan. This would be true if the loan is secured by your primary home. But you are then putting your home at risk if you can’t make payments on the loan. With an unsecured business loan, you cannot write off the interest because it is not collateralized. This prevents any of your assets from being at risk.
Now that you know the difference between the two, you should take a moment to decide which one you will choose based on what you need and how much money you will need to borrow. It is also a good idea to correct any mistakes on your credit report before applying for a loan. With this knowledge, you should be able to go to your lender and get the best loan for your business. Good luck!