The risks and rewards of unsecured vs. secured business loans

Many business owners turn to a business loan in order to fulfill their financial requirements and to successfully steer their businesses in the right direction. However, especially if you’ve never taken out a loan before, it can all seem pretty confusing. You just ask the bank employee about a business loan and next thing you know they’re asking you about unsecured business loans and secured business loans. What does it all mean? Well, we’re here to tell you exactly what it means, and by the time you finish reading this piece, you should know the differences between unsecured and secured business loans and which is better for you.

The main difference

The main difference between the two is how the lender handles compensation in case of defaulting. Defaulting means not being able to make your payments as scheduled, and thus not respecting the conditions of the loan. Depending on which type of loan you went for, the lender will take a different course of action.

Unsecured business loans

If you default on unsecured small business loans, you are looking at a rough time because the lender has the right to sue you. Not only do they have the right, but they probably will since it’s a business and they don’t want to just lose the money they’ve lent to you.

If you default on a secured business loan, you will lose your collateral. What is collateral, you ask? It’s whatever you want it to be, as long as it was expensive. Basically it’s one asset or multiple assets which will be offered as a guarantee. If your credit score is bad or you have a poor financial history, a bank for instance will mostly offer you a secured loan. That’s because they don’t trust you enough for the unsecured loan.

The interest rates

The interest rate is another form of guarantee for the lender that you will pay on time and that they can trust you with their money. On top of what you borrowed, you will pay an interest rate, which is an added percentage calculated differently based on what type of interest rate you are offered (fixed or changing).

With secured loans, your business puts up collateral as a guarantee so the lender will be OK with charging you a lower interest rate. With an unsecured loan however, there’s nothing to guarantee that you will come through, so the interest rates are usually higher here.

Which business loan is better?

It’s not a matter of which is better, but rather which is better for you. If you have bad credit but need the loan, the secured loan might be a good choice for you because the interest rates are lower. If you can make sure you can pay back on time, you aren’t running the risk of losing your collateral. However in other cases an unsecured loan might be the better pick since you don’t have that pressure of losing your house for example.