(Newswire.net — January 22, 2020) — Most small businesses arrive at some point in the situation where they need external funds. It’s not necessarily a bad thing. You may need to pay off some debts and don’t have all that money available. Or you are actually doing well and consider expanding your business but don’t have the funds in your budget for the additional expenses. For all those situations there are many types of loans available on the market. If you have even a bit of experience in loans, you know you can either provide collateral or go for unsecured small business loans.
Secured Business Loans – Pros and Cons
Secured business loans force you to provide collateral. That means you will have to guarantee the loan with any assets you may have that are valuable enough and that the lender considers appropriate. So, if you cannot make the payments, those assets will cover the loan. It’s not surprising that these are the type of loans preferred by banks and lenders in general.
But there are advantages for both sides with these secured loans. Here are some of the reasons you may want to consider this type of small business financing:
- Very fast approval time, especially if you are choosing an online lender. After that, you can receive the money very quickly, usually between 28 to 48 hours.
- The amount of money you can receive is not necessarily determined by the value of the collateral. They may consider the state of your business as well as your own finances when they make a decision. In fact, in some cases, you may even have the surprise to qualify for a higher sum than you had expected.
- If you get a secured business loan and do a good job making the payments on time, you will actually be improving your credit profile.
- If your business is rather new and doesn’t have an extended track record, this type of loan is easier to get.
- Unsecured business loans are more flexible when it comes to the reimbursement period.
There are also two pretty important disadvantages:
- You risk losing the collateral if you fail to make the payments. While some lenders will accept your savings as collateral, it’s usually a piece of real estate or some valuable inventory that is placed as a guarantee. So, you risk losing something you have spent a lot of money and time on.
- The interest rate will probably be variable. The problem is that can either work for you or against you. In any case, you need to be prepared every month for the worst-case scenario.
Pros and Cons of Unsecured Small Business Loans
If you have a good credit history you will have no problem accessing an unsecured business loan. They are even available for those who haven’t done such a great job paying the debts on time. But there are pros and cons for this type of loan as well.
Advantages:
- Unsecured small business loans are a chance at financing even for those who have no assets to place as a guarantee. You will be relying only on your business’ revenue to make the payments.
- Your personal credit score is safe. This type of loan isn’t connected to your personal finances, so that part of your life won’t be affected.
- You will receive the money faster than you think. Since no collateral is involved, there’s less paperwork to be done.
Disadvantages:
- Higher interest rates. Since you aren’t providing collateral, the lender is facing a greater risk, so it makes sense to protect their investment by increasing the rates. So, while you aren’t putting your assets at risk, you are placing a heavy and constant burden on your budget until the loan will be paid off.
- Shorter refunding terms are another disadvantage. Again, since they don’t have any guarantee from your part, lenders are interested in getting the money back as soon as possible. That means you will have to make the payments on a monthly or weekly basis, depending on the contractual terms.
- The sums you can access through unsecured small business loans are lower. That’s another consequence of the fact that there is no collateral involved.
- This type of loan doesn’t have the advantage of tax reduction benefits other loans have. But this only becomes an issue if your business is making enough profit to worry about taxes.
FAQs on Secured and Unsecured Small Business Loans
What can I use as collateral if I choose a secured small business loan?
Lenders will consider collateral any asset that has enough value when sold to cover your loan. So, it can be anything from a building, a vehicle, a piece of expensive equipment, or inventory.
Does the lender impose any restrictions on the way I can use unsecured funds?
No, you can use the money any way you want. However, presenting a business plan when you apply for the loan will increase your chances of approval.
How soon do I have to refund an unsecured small business loan?
That aspect may vary from one lender to another, but the term is usually between 2 and 36 months.
Secured vs. Unsecured Small Business Loans – Which Are Better?
Since there’s such a rich offer on the market for both types of loans, it’s fair to say they are both good choices. The real question small business owners must ask themselves is which one is more appropriate to their specific situation. Before applying they should look at their business both from their point of view and from the lender’s. They need to balance their needs and the possibilities they have to pay certain rates or provide any collateral. Once all the aspects have been considered, it’s time to make a decision.