If you run a small business, you may eventually need to take out a loan. Whether you’re expanding your store, purchasing new equipment, or starting a new marketing campaign, you may need extra working capital to accomplish your organizational goals. In this article, we’ll break down the differences between unsecured and secured business loans – so that you can understand what’s right for you.
Secured Loans Vs. Unsecured Loans – What’s the Difference?
First, we need to define secured loans vs. unsecured loans:
- A secured business loan is, literally, secured by some kind of asset. In other words, you put some kind of property up as collateral for the loan. If you don’t repay the loan as agreed, the lender is entitled to take this property as compensation for the loan. Think of a mortgage. This is a type of secured loan. (Though it’s not a business loan.) If you don’t pay your mortgage, the bank can take your house, sell it, and recoup their investment. This reduces lender’s risk – but increases the risk for the borrower.
- In contrast, unsecured loans are not secured by any kind of property. This means that the lender has a higher risk – as they may not be able to get their money back if the borrower doesn’t pay. Also, the borrower has a lower risk, as they were not required to put up any collateral for the loan.
Common Types of Secured Business Loans
Secured business loans are often easier to obtain, even if you don’t have great credit. This is because they are less risky, and the lender will have an asset to seize if you don’t pay.
Examples of Secured Business Loans include:
- Equipment loans – This is a loan taken out specifically to purchase heavy equipment for businesses such as construction company’s. This equipment acts as the collateral for the loan, reducing the risk for the lender.
- Business equity loan – A business equity loan is taken out against the equity of your home, allowing you to leverage your home equity to get money that you can use to expand your businesses.
Common Types of Unsecured Business Loans
Unsecured business loans are usually harder to qualify for. You must have excellent credit, and a history of repaying your debts on time.
Examples of Unsecured Business Loans include:
- Small business bank loans – You can think of these loans as a business-focused counterpart to a secured personal loan. Banks are typically only willing to offer small business loans, until you have proven that you can repay your debts consistently.
- Business line of credit – This is similar to a business credit card. You get a certain amount of credit – say, $10,000 – and can use it at any time. You can draw and repay funds whenever you want, as long as you do not exceed your credit limit.
Know If A Secured or Unsecured Business Loan Is Right for You!
Secured and unsecured business loans have pros and cons depending on your business model and financial structure. Make sure you understand the difference between the two, and that you pick the right option for your business!