When your searching for the right business loan, you’ll be faced with two choices: an unsecured loan or a secured loan. What’s the difference?
An unsecured business loan is a loan made to a business without collateral. A secured small business loan is a loan made with something used as collateral for the lender to recoup their losses if the business defaults. below is a look at unsecured versus secured loans. If you want to compare business loans to see what type are secured or unsecured, see our recent infographic here.
- — Collateral is a must. Typically it is something of value equal to that of the loan amount. It acts as the insurance for the lender, as they can acquire your collateral should you default on the loan. Sometimes the collateral amount will need to be higher than the loan value, as the cost to use the collateral to defray the costs of the loan can be high. For example, in order for a lender to use real estate to cover unpaid debt, they would have to sell it, and pay an agent to list and market it. Collateral can be accounts receivable, real estate, machinery, etc. It is anything pledged against the loan debts.
Unsecured — These business loans are given without any security from the borrower other than their credit rating and the financial strength of their company. A lender would judge their ability and history of repaying debt.
- — Because secured loans are less risky for banks, they often offer lower interest rates than other loan types. They are also typically longer term loans than an unsecured loan. The amount of the loans will vary based on the amount of collateral available, but can be very high.
Unsecured — Unsecured loans rarely exceed $50,000, and are considered short-term streams of financing. They are typically used only as second-level funding, and are often offered to established companies. In most cases, a company needs to have been in business for at least two years, and show earnings of $100,000 or more a year to be considered for unsecured loans.
- — These are far easier to obtain than unsecured. They are more readily available simply because they pose less risk to the lender.
Unsecured — These are for established companies, not start ups, and credit must be great, and business financials strong in order to even be considered for this loan type.
Secured loans offer the best interest rates and terms, and are easier to get approved for than unsecured loans.
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