Still debating whether you should take a secured vs unsecured business loans? It is like you are standing at a juncture from where you can see two different roads leading to different ways with different objectives. Yet, you can not decide on which path to walk because of the various outcomes and consequences. A similar situation occurs when taking a loan. If you want to take a loan and you have two options, such as a secured loan and an unsecured loan, you will need to have a proper understanding of both the terms and also understand which one is better.
In simple words, with the help of this blog, you will get a better understanding of which type of loan is a better option for your business and what the benefits of each type of loan are for a business.
What is a Secured Business Loan?
An asset-backed loan is a financing method in which an enterprise uses an asset as a guarantee and protection for the credit it is taking. The asset can be anything that has a shape or form, such as a building, equipment, or even a savings account, which in turn minimises the risk of lending and can lead to better terms, such as lower interest rates and higher loan amounts. If a borrower defaults on the loan, the lender can take possession of the collateral and sell it to recoup their money owed.
What is an Unsecured Business Loan?
An unsecured business loan is a loan that does not require the business owners to use their own personal or professional assets as a security or collateral to take a loan. The lenders approve these loans based on the business’s creditworthiness and financial health, such as its credit history, revenue and cash flow. As there is no collateral, the lenders take on more risk, which often results in higher interest rates as compared to secured loans.
Difference between a Secured and an Unsecured Business Loan
| Feature | Secured Business Loan | Unsecured Business Loan | Results |
| Collateral | Collateral is required in a secured loan because it acts as security for the lender. | Collateral is not required in an unsecured loan because the borrower does not have tangible assets to attach to the loan. | An unsecured loan is the winner because it helps with easy access for small startups and small-scale businesses. |
| Interest Rate | It is generally lower as there is a security involved. | It is higher because the lender takes a huge risk before approving the loan. | A secured loan is the winner because it is more convenient and affordable for long-term loans. |
| Loan Amount | It can be higher as it is a secured loan. | The loan amount is lower as it is an unsecured business loan. | Secured loan again wins here as it is the best option during business expansion. |
| Repayment Term | The repayment term can be longer because the amount is also huge. | The repayment term is shorter, between 5-7 years, because the loan amount is smaller. | Secured loans gain another point here, as it is comfortable for repaying large amounts. |
| Risk to the lender | The risk to the lender is lower because, in case there is a default in payment, the lender can sell off the collateral to recover the rest loan amount. | The risk to the lender is higher because there is no collateral attached to the loan. | Another point about Secured loans is that it is less risky for the lenders and easier for huge loan approvals. |
| Application | Longer process due to the collateral verification | Quicker process as there is no need for a verification. | An Unsecured Loan is the clear winner because it is the best option when quick funding is required. |
| Best For | Larger, long-term investments. | Smaller businesses or short-term needs. | It is a tie here because it depends on the needs of the business. |
Which is the best-suited loan option for businesses?
The best-suited loan option amongst the secured and unsecured business loans depends on the specific needs, financial situation and risk tolerance of the business. Secured loans generally offer better terms at a higher risk, while unsecured loans offer faster, lower-risk access to smaller funds.
Secured Loans are the best option for:
- Businesses that are well-established with valuable assets.
- The large funding, long-term investments, like purchasing commercial property or major equipment.
- Businesses that can handle a longer application process.
Unsecured Business Loans are the best option for:
- Smaller or newer businesses that do not have significant tangible assets to offer as security or collateral.
- The Businesses that need fast access to cash for short-term needs like inventory, marketing or operational expenses.
- The businesses with a strong credit history and solid financials.
Conclusion
For entrepreneurs who are applying for a loan, whether secured or unsecured business loan, it gets very difficult to decide on which type of loan they want. Therefore, before deciding on which type of loan you will apply for, it is important for you to know the requirements and needs of your business.
Through this blog, we have discussed the differences and the best option for businesses and their owners who are deciding to get a business loan. A secured loan is always the best choice for those who have an established business and have assets to attach for a business loan, while an unsecured loan is the best option for those who have a startup or are a small-scale business and do not have enough assets to attach to the business loan.
