One of the primary differences between types of business loans is whether they are secured or unsecured loans. A secured loan is taken out against something you own that’s of appropriate value. Depending on the size of the loan this could be anything from a watch, to a vehicle, to the business premises itself. In the event of failure to pay the loan, the asset will be sold to recover the value of the debt. With an unsecured loan, you’re not borrowing against anything. Generally, finance vendors will instead look at your credit rating and financial history to determine if they can trust you to pay back the loan, and on what terms. In this article we look at the advantages and disadvantages of secured and unsecured loans.
What’s good about both
A major benefit of a secured loan is that they are generally relatively easy to qualify for since it’s your collateral which will be relied on in the event of failure to pay. They also generally attract lower interest rates which make them more manageable for the majority of SMEs.
The attraction of an unsecured loan, however, is that in the event of failure to pay, your personal property is not going to be sold off to cover the debt. An unsecured loan may offer less perceived pressure and is generally the more favoured method for small to medium sized loans.
What you need to think about
A secured loan, by its very nature, means that if you default on the payments you’re liable to lose a valuable piece of property to offset the debt you owe, so it’s important to plan ahead. A secured loan can also take longer to establish, due to the procedure involving more formalities, such as asset valuation.
With an unsecured loan, however, you have to remember the vendor has nothing to secure the loan against, so it’s potentially riskier for them. This often means that interest rates are higher, and due to the fact unsecured loans are generally over a shorter period of time the monthly repayments themselves can be higher too. However, the nature of this type of loan means it can be arranged faster and with more flexibility.
Think carefully about your business financial situation when deciding between a secured or unsecured loan.
Secured and unsecured loans – where to find out more
If you are needing finance to fund your start-up or expansion of your business, please visit our Alternative Finance page to find out more about the services we offer.
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