Small businesses are in a unique space financially, they have a multitude of options at their fingertips that offer secured and unsecured business loans. Knowing the difference between secured and unsecured business loans would help you understand which type of funding would best help grow your business.
What is a secured business loan?
A secured business loan requires some type of collateral the borrower pledges to the lender as security for the loan. This offers a safety net for the lender reducing the risks associated with lending money which in turn provides the borrower with lower interest rates and more flexible terms. These loans are often preferred by businesses that need a substantial amount of funding or are trying to secure better repayment terms.
The most common forms of collateral used for secured business loans are:
Property
Vehicles
Business assets
Inventory
Equipment
Types of Secured Business Loans
What is an unsecured business loan?
An unsecured business loan doesn’t require collateral and is based on credit score, time in business, and revenue. This reduces the borrower's concern of losing an asset, it however increases the risk to the lender which leads to higher repayment terms and borrowing limits.
Unsecured business loans offer businesses that do not have the assets available to pledge collateral access to funding. Allowing these businesses to build business credit and expand without having to risk assets. At Capital Infusion our unsecured business loan requirements are at least 6 months in business, a 600+ personal credit score, and at least $10,000 average monthly revenue.
Types of Unsecured Business Loans
Pros and Cons of Secured and Unsecured Business Loans
Secured | Unsecured | |
Collateral | Some form of collateral is required to secure the loan, like property, inventory, or equipment. | Collateral is not a requirement, approval is based on credit score, time in business, and average monthly revenue. |
Rates | Due to the reduced risk to the lender secured business loans offer lower rates and flexible repayment terms. | Rates are typically higher due to the risks the lender faces without the security of collateral. |
Terms | Lenders often offer extended repayment terms, offering more flexibility for long-term financial planning to their borrowers. | Terns are often shorter, offering less flexibility for repayment. |
Loan Amounts | Collateral often increases the lender's security enabling larger funding to cover higher expenses. | Loan amounts are typically smaller due to the risk lenders face. |
Asset Risk | There is a risk of defaulting and losing the collateral pledged when securing the loan, careful financial planning is crucial to avoid defaulting. | There is no risk of defaulting and losing any collateral pledged reducing the risk the borrower faces. |
Choosing a funding option that is beneficial to your business is important, both these options give your business unique funding opportunities. Understanding which one to choose is important, you must first begin by assessing what your business needs, how quickly it is needed, and what matters the most for securing that funding.
If your business has assets available, and you are looking for lower rates, and longer terms a secured loan may be ideal. If you do not have assets but meet basic requirements and are looking for quicker funding an unsecured loan is something you should consider.
Conclusion
Secure and unsecured business loans offer small businesses different advantages, while secured loans may offer better terms and rates unsecured loans offer faster financing and flexible requirements. When deciding which financing is best for your small business keep in mind what can you risk, how quickly is it needed, and does your business qualifies based on credit score, time in business, and average monthly revenue.
At Capital Infusion, we offer unsecured business loans and provide clients with knowledgeable representatives who can help guide the decision to the most beneficial option. Apply today and learn what your business qualifies for!
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