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Key Takeaways
A secured business loan requires collateral to back the loan. Unsecured business loans typically require a personal guarantee, but secured loans can have lower interest rates and higher borrowing limits. A secured loan may be a good choice for those with a lower credit score or looking for more competitive loan terms, while an unsecured loan is a good choice for those without assets.
Small business loans can be secured or unsecured. Secured loans require collateral to back the loan. Unsecured business loans do not require collateral. Lenders may offer one or both of these small business loan options, but each has its own pros and cons.
Secured or Unsecured Small Business Loans: What's the Difference?
Most business loan types are available with or without collateral. A secured loan requires the borrower to provide something of value as collateral. This collateral can be business equipment, real estate, vehicles, accounts receivable, inventory, or other assets. If the borrower defaults, the lender can seize the collateral.
Low-interest unsecured small business loans are typically offered to borrowers with good credit scores. These loans do not require collateral because lenders trust that the borrower will repay the loan based on a good credit history. Types of low-interest unsecured loans include term loans and business lines of credit.
There are unsecured business loans available for people with poor credit, but these are considered high-risk loans. Because of the higher risk, lenders may charge higher interest rates or factor rates and impose additional fees. Depending on the lender, high-risk unsecured business loans may include term loans, business lines of credit, and merchant cash advances.
However, unsecured business loans often require a personal guarantee, which allows the lender to go after the guarantor's assets. Lenders typically require all business owners who own more than a certain percentage of the equity to provide a personal guarantee.
Let's look at the main differences between secured and unsecured business loans.
Secured business loans Small business loans without collateral Collateral required No collateral required Low interest rates High interest rates Available to borrowers with little credit history or low credit scores A higher credit score may be required Lenders can seize collateral if the borrower doesn't repay the loan Lawsuit required to begin collection on a defaulted loan Borrowing limits are usually higher because there is collateral backing the loan Borrowing limits may be lower because the loan is not backed by collateral A personal guarantee may be required A personal guarantee is usually required
Bankrate Insights
Lenders need to assess the value of your collateral to see if they can cover 80 to 100 percent of the loan in the event of default. Examples of collateral include cash, real estate, inventory, and vehicles.
Pros and Cons of Secured Business Loans
Before you apply for a secured small business loan, keep these advantages and disadvantages in mind.
Strong Points
Lower minimum interest rates than unsecured loans Lenders often allow higher borrowing limits It's easier to qualify for a secured loan
Cons
Borrowers must have assets that can cover 80% to 100% of the loan. The collateral needs to be appraised, which can be a time-consuming procedure. If you default on your loan repayments, the lender can seize the assets you used as collateral.
The Pros and Cons of Unsecured Business Loans
Unsecured business loans also have pros and cons worth considering.
Strong Points
No business collateral is required, and there is no appraisal process, which can lead to quicker funding.
Cons
Costs may be higher Qualification requirements may be tougher Loan amounts may be lower
Secured or Unsecured Small Business Loans: Which is Right for Me?
Choosing between secured and unsecured small business loans will depend on factors such as your credit score and whether you have assets to secure the loan.
A secured loan may be right for you if:
You're a startup business owner with no assets to back a loan. Your credit score is so bad you can't qualify for an unsecured business loan. You want the highest loan amount and the most favorable loan terms.
An unsecured loan may be the better option if:
You are short on assets or don't want to risk losing them. You need cash immediately and are not willing to wait for your assets to appreciate.
If you qualify for both types of loans, weigh the benefits and risks of each before deciding which is best for you.
Conclusion
Both secured and unsecured business loans can be useful for business owners who need working capital or long-term financing, but choosing the right type for you depends on a few key factors, including your credit score and available assets.
If you can't qualify for either type of small business loan, there are alternatives to consider. These include a personal loan or a business credit card. While both may be easier to obtain, a business credit card can help you build business credit, which could lead to better financing options in the future.
Frequently Asked Questions About Secured and Unsecured Business Loans
Are SBA loans secured or unsecured?
There are several types of SBA loans, and requirements vary depending on the loan type and lending partner. Some lenders may require collateral for certain loan types, while others don't. For example, for 7(a) loans of $25,000 or less, the lender doesn't have to take collateral. For loan amounts over $350,000, the lender must secure collateral in an amount equal to the loan amount. Ultimately, you should discuss the type of SBA loan you're considering with your lender to see if collateral is required.
Is it better to take out a secured or unsecured loan?
Both secured and unsecured loans have their benefits. If you have a low credit score but want competitive interest rates, a secured loan is the better option. If you don't want to put your assets at risk or don't mind a higher interest rate on the loan, an unsecured loan is the better option. The better option will vary from business to business.
How do I get a secured or unsecured business loan?
There are many small business lenders that offer secured and unsecured business loans, and the application process varies by lender and loan type. However, some parts of the application process are similar. You will probably need a business bank account, a business taxpayer identification number, past financial statements for your business, and a detailed plan for how you will use the loan funds. If you are applying for a secured loan, you will also need to provide collateral and documentation proving that the collateral belongs to you or your business. Talk to your lender for more information about applying for a business loan.
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