The key difference between secured and unsecured loans is that secured business loans require you to put up assets, while unsecured loans don’t. Keep in mind that most unsecured loans will require either a personal guarantee or a business lien to protect the lender from defaults.
Secured business loan rates are better than unsecured loan rates because the overall risk of the loan is lower.
One of the most important distinctions between secured and unsecured loans is if a borrower goes out of business and needs to liquidate assets to pay off debts, lenders with secured agreements are paid first. Depending on the circumstances, payment may take the form of repossession of property.
Is a Secured Small Business Loan Right for You?
If you have assets to pledge as collateral to secure business funding, and if you’re willing to post them, the answer is yes.
If the answer is no, an unsecured loan probably is a better fit for you. If you find yourself having difficulty deciding between a secured or an unsecured loan for your business, consider the following:
- Do you own your business assets?
- How much funding are you looking for?
- What is your credit score?
These 3 factors will play a large role in helping you decide which loan type is right for you, as well as which loan type you have a better chance of qualifying for. (Note that a secured business loan with bad credit is possible if a business owner has the collateral to back the funding.)
Let’s break down each of these considerations:
Owning Your Assets
Without owning your assets, you won’t be able to provide them as collateral. Even if you’re 97% paid through your lease-to-own agreement for an asset, you won’t be eligible to pledge that specific item as collateral until you’re the legal owner.
Desired Funding Amount
While $10,000 is a significant amount of money in just about any situation, in the context of the financing, it isn’t very steep. However, for businesses looking to obtain more than $10,000, lenders typically will ask for some form of collateral to secure the funds. Although it isn’t uncommon for unsecured loans to exceed $10,000, the terms will be more attractive to both parties if collateral is involved.
Your credit score indicates to lenders how effective you are at managing your money and repaying debts. In terms of helping you secure a business loan, the higher your credit score, the lower your secured business loan collateral requirements and the better your terms are likely to be. Even if you have a bad credit score, valuable collateral can offset the risk.