Is A Small Business Loan Secured Or Unsecured? – A Comprehensive Guide

Is a small business loan secured or unsecured? – A loan being secured and unsecured depends on what you apply for. Let?s get into the nitty gritty…

Basically, small business loans can be both secured and unsecured. A secured loan asks for security, while an unsecured loan does not ask for any significant security. However, an unsecured loan?s interest rate can be significantly higher than a secured loan.

In this article, you will learn about secured and unsecured loan options. Firstly, you will get an overview of both types of loans. Secondly, you will learn about the pros and cons of both types of loans.

Finally, you can decide which type of loan is better for your business. Hence, to learn more, read on to the end of the article.

A General Overview Of Small Business Loan

Small business loans are commercial financing for businesses. Generally, the lenders of these loans are traditional banks, credit unions, and online lenders. However, there are certain qualification requirements for businesses that are applying for loans.

If you have a business plan and you have figured out how to make money through your business, a loan will help your business grow. Once you secure a loan, you will get funds. Then, you can use those funds to cover growing and operating your business.

Apart from that, you can also use those funds as working capital or for equipment purchases. On the other hand, you can also use those funds for larger purchases like real estate. To get a better idea of how to use funds, you can use the help of a startup consulting company.

Depending on the type of loan that you apply for, the lender might require repayment daily, weekly, or monthly. This goes on until you fully repay the loan.

In general, lenders offer loans to business owners either in the form of a lump sum payment or a credit line. Once you get this funding, you agree to repay the money that your business borrows over time. Apart from that, you must pay interest and loan fees.

Is A Small Business Loan Secured Or Unsecured?

When you secure a small business loan with a specific collateral, it becomes a secured loan. Generally, collateral includes business assets, inventory, equipment, or real estate. In this case, your lender also requires a personal guarantee apart from collateral.

Basically, the collateral you keep for appraisal offers security to the lender. It allows the lender to ensure that the borrower has a motive to repay the money. However, if the borrower defaults on the loan, the lender has the right to seize the collateral to cover the losses.

Hence, many lenders try to offer secure business loans. This is because by taking the collateral, the lender helps offset the risk when dealing with small business borrowers.

Generally, banks, credit unions, online lenders, etc., offer secured business loans. Moreover, there are different types of secured loans. Some examples include term loans, SBA loans, business lines of credit, etc.

On the other hand, an unsecured business loan does not require you to keep collateral. However, you will still need to keep a personal guarantee for the loan. Since there are no conditions for collateral, it is difficult to apply for an unsecured loan.

Moreover, as the lender asks you to give a personal guarantee, it makes you individually responsible for the debt if you become a defaulter. Additionally, offering a personal guarantee gives the lender the right to seize your personal assets. This helps the lender to recover losses if you are a defaulter on the loan.

Difference Between Secured And Unsecured Loans

The use of collateral defines the difference between secured and unsecured business loans. As you keep collateral with the lender, it provides an additional guarantee to the lender that you will repay the loan. As a result, it becomes less risky for the lender to issue a small business loan.

The following are some of the major differences between secured and unsecured loans:

However, business credit cards for startups are better options if you want to boost your credit score for your business.

Business Credit Cards: Why They Are Better?

One of the best things about business credit cards is that you have enough access to capital to cover the needs of your business. Thereby, you are better positioned to make smart investment decisions for your business. As a result, you can respond to major changes in the market and update your operations.

It is always a better option to apply for and benefit from business credit cards. However, you must choose the card that best suits your business needs.

For example, some businesses use credit cards for expenses like buying supplies, furniture, equipment, etc. However, these cards mostly have terms and conditions that might restrict you from using them for your personal expenses.

Hence, if you want to build a credit score for your business, using business credit cards is a better option than using secured and unsecured loans. Moreover, with the help of these cards, you can even get short-term financing.

Another great thing about business credit cards is the fast and straightforward application process. Also, the approval process is not that difficult to get past. Therefore, if you want fast access to capital and build business credit, you will not have a convenient option with business credit cards.

Secured Loans: Major Pros And Cons

The following are the major pros and cons of secured loans that you need to learn:

Pros

Here are the major pros of secured loans that you will benefit from:

• Generally, they have lower interest rates. However, it depends on the credit score and assets of the applicant.
• The borrowing limits are often high for these types of loans.
• You can easily qualify for this loan if you can ensure enough security and collateral.

Cons

Here are a few cons of secured loans that you need to be aware of:

• As a borrower, you must have valuable assets that cover eight to a hundred percent of the loan amount.
• To avail of the loan, you have to appraise collateral. However, this step consumes a lot of your time.
• If you fail to repay the loan, the lender can seize the assets you kept as collateral against the loan.

Unsecured Loans: Major Pros And Cons

Some examples of unsecured loans include business lines of credit, term loans, merchant cash advances, etc. The following are the major pros and cons of unsecured loans that you need to learn about:

Pros

Here are the major pros of unsecured loans that you will benefit from:

• You do not need enough business collateral to secure an unsecured loan for your business.
• Since there is no collateral appraisal process, you can get the loan within a short time frame.

Cons

Here are a few cons of unsecured loans that you need to be aware of:

• Unsecured loans are generally expensive and come with significantly high interest rates.
• Eligibility requirements can be strict in some cases since there is no appraisal process.
• Moreover, the loan amount that you apply for can be low in many cases.

Secured vs. Unsecured Loans: Which One Is Right For You?

Is a small business loan secured or unsecured? – You can see that a small business loan can be both secured and unsecured. It depends on what is the source of your borrowing. However, your credit score and assets determine the type of loan that is right for you.

Both secured and unsecured small business loans have respective pros and cons. Also, both help businesses that need working capital and long-term financing. Although both options are easy to qualify for, a business credit card can help you build your credit score.

Do you have more information on secured and unsecured loans? Please share your ideas and opinions in the comments section below.

Read Also:

• Smart Hacks to Manage Your Personal Credit Effectively
• How to Get a Startup Business Loan? – Steps You Need To Follow
• What Is A Small Business Line Of Credit? Everything You Need To Know (2024)