Unsecured vs. Secured Business Loans

As a small business there will be times when you need to borrow money. This may be for working capital, expansion, etc. Choosing between unsecured and secured business loans is not always easy. Here is some information about the two types of business loans, to help you better determine what is best for your small business.

First, what is secured versus unsecured? An unsecured business loan is a loan made to a business without anything to secure it, such as a form of collateral. A secured business loan is the opposite. There is some form of collateral in place to help the lender recoup losses if the business defaults on the loan.

Here is what you should know:

What you need to get a loan-
Secured- Collateral is what makes it a secured loan, and it should be something of equal value to the loan amount. In some cases it will be worth more because of the cost of liquidating it to cash.This collateral is insurance for the lender, as they can acquire the collateral should the small business default on the loan. A lender will determine what kind of collateral they will accept, but it can be accounts receivable, real estate, machinery, inventory, or any number of other things that will be pledged against the debt.

Unsecured-There is no collateral. The "collateral" as it were is the credit of the borrower. A business loan given without collateral is based on the credit history of the small business. Because there is nothing tangible at risk, the loans are more difficult to obtain.

The terms and conditions-

Secured- Secured loans can be for about any amount, and because they offer less risk for banks, they come at lower price tags. In other words, you get longer loan terms (can borrow the money for longer), and lower interest rates. Of course, the amount and terms will vary based on the lender, the collateral offered, and the reason for the loan, but terms tend to be more favorable for secured loans.

Unsecured- Unsecured loans are unlikely to be over $50,000. They are used as short-term financing, meaning the money can only be borrowed for a short time. They are often only used as a secondary level of funding after a first loan is given. In order to qualify for an unsecured loan a business must have two years worth of income tax returns, and show earning of $100,000 or more. Interest rates are higher on unsecured loans as lenders have more to lose.

Likelihood of approval.
Secured- Because there is far les risk involved for the lender, it is easier to get approval for the loan. It may take a few days to verify collateral, but loans of this type are the easiest to obtain.

Unsecured- Because you have to meet certain conditions and have good credit, these are harder to obtain. In addition to a good history of credit, two years of business, and proof of $100,000 earnings each year, a business must have strong financials indicating they will continue to have profits, and be able to repay the loan.