As you explore various business loan options, naturally you’ll focus on issues such as interest rates, repayment terms, and so on. These are important factors, and need to be part of your overall evaluation and decision-making.
However, there’s another that is critically important, and therefore needs to be front and center as you weigh your options: whether the loan is secured or unsecured.
Secured vs. Unsecured Loans
A secured loan is when you pledge an asset -- or often, multiple assets -- as collateral for a loan. The asset(s) then becomes a secured debt for the lender (e.g. bank). If you default on the loan, the lender takes ownership of the asset to cover some or all of the amount owing.
An unsecured loan doesn’t require collateral. Of course you still need to pay back the loan. But if for some reason you can’t, then your assets -- such as your property, equipment, vehicles, and so on – are not at risk of being transferred to the lender.
As you might expect, generally speaking secured loans – which are the only kind of loans that banks provide -- are offered at relatively lower interest rate than unsecured loans. And so on the surface, it may seem wiser to seek out a secured loan. However, unsecured business loans can offer you much more freedom and less risk. Below, we highlight the key reasons why:
- Rapid Access to Desired Funding
As mentioned, banks only provide secure loans. And if you’ve applied for a bank loan in the past or know someone who has, then you’re aware that it’s a very long process – one that can easily last for several months. For most borrowers, this excessive waiting period is just not acceptable. The expense that they need to cover won’t wait, or the opportunity they need to seize won’t be available.
Unsecured loans, however, are a completely different story. Your online application is reviewed within 48 hours, and upon approval the funding is in your account within a matter of days.
- Much Easier to Get
Even if you can tolerate waiting months for a secured bank loan to materialize, then there’s another problem on the horizon, and this one is much bigger: getting a bank loan in the first place is harder than it has ever been. That’s because banks are taking on zero risk, and they’re typically only approving loans for borrowers with perfect (or near perfect) credit scores, and at least two years of credit history.
Unsecured business loans, again, are a much different story. Bad credit will not necessarily disqualify an application, and usually only 2-3 months of credit history is required. Even borrowers with a bankruptcy on their file won’t be denied, provided that it has been legally discharged by the time they submit their application.
- No Nasty Collateral Evaluation Surprises
Let’s say you need to pledge $60,000 worth of assets as collateral for a secured loan. Your $40,000 vehicle plus $20,000 piece of equipment should take care of that, right? Wrong! Banks are notorious for under-valuing collateral, and may deem that your assets are only worth $40,000. That means you need to come up with another $20,000 – which, again, is $20,000 according to the bank; not according to you.
However, ws mentioned above, unsecured loans don’t require collateral of any kind. So you don’t have to worry about dealing with a bank’s ridiculous and frankly, offensive lowball evaluation.
The Bottom Line
As you can see, the differences between a secured business loan and an unsecured business loan are about much more than the interest rate – because the latter gives you far more freedom and less risk!
To learn more about our unsecured business loan options, contact our Funding Experts today for your free, no obligation consultation.
If you're looking for more information on how an unsecured working capital loan differs from a secured bank loan, download our FREE eBook below: