Updated: Nov 22
Wondering what is the difference between secured and unsecured business loans and which one will better benefit your business? If you're a business owner seeking financial assistance, it's essential to understand the key differences between these two types of loans. Making the right choice can have a significant impact on your business's financial stability and growth prospects.
TABLE OF CONTENTS
In this quick guide, we break down the nuances of secured and unsecured loans, explore the pros and cons of each option, and provide valuable insights to help you make an informed decision. Whether you're looking to expand your operations, invest in new equipment, or manage your cash flow effectively, we've got you covered.
FIRSTLY, WHAT IS A BUSINESS LOAN?
An Approved business loan is a lump sum over a fixed term, and with our streamlined process, quick approval and tailored monthly repayments, you can be assured that we will find the best deal for your business. You can check your eligibility for business loans in seconds.
WHAT ARE THE DIFFERENCES BETWEEN SECURED AND UNSECURED BUSINESS LOANS?
A secured business loan requires the borrower to provide collateral as a form of security to the lender. Collateral is an asset of value that the lender can claim if the borrower defaults on the loan. Common forms of collateral for a secured business loan can include real estate, equipment, inventory, or other valuable assets. By offering collateral, borrowers can often access larger loan amounts and may benefit from lower interest rates since the lender has a way to recoup their losses if the borrower fails to repay the loan.
Lower interest rates.
Higher loan amounts available.
Easier to qualify for, even with less-than-perfect credit.
The risk of losing the pledged collateral if the loan is not repaid.
Longer application process due to collateral evaluation.
An unsecured business loan, on the other hand, does not require any collateral. This means the borrower doesn't need to pledge any assets to secure the loan. Instead, the lender assesses the borrower's creditworthiness based on factors such as credit score, business revenue, financial history, and other business-related metrics. Since there is no collateral to mitigate the risk for the lender, unsecured loans typically have higher interest rates and may have more stringent eligibility requirements.
No risk of losing collateral.
Faster application and approval process.
Suitable for businesses that lack valuable assets to use as collateral.
Higher interest rates.
Smaller loan amounts available.
May require a stronger credit and financial history.
WHAT ARE THE KEY ADVANTAGES?
Cash flow management:
Acquire assets without upfront payment, preserving working capital and maintaining cash flow.
Flexibility and scalability:
Tailor the repayment structure to meet specific business needs, allowing for easy upgrades or replacements as requirements change or expand.
Working capital support:
During periods of financial challenge or temporary cash flow constraints, a business loan can provide the necessary support to bolster working capital.
Keep Equity & Control:
The benefit of opting for a business loan instead of an investment lies in retaining complete ownership and autonomy, as the lender does not exert any control over your business operations. Conversely, investors typically request a share in the business in exchange for their financial contribution, often seeking influence in key decision-making processes.
Fast Pay Out:
Business loans are known for their streamlined process, requiring only minimal documentation, and ensuring swift disbursal to companies. This ensures that businesses can continue their operations and pursue growth plans without any interruptions or delays caused by waiting for funds.
EXPLORING THE SHORT-TERM BUSINESS LOAN OPTIONS:
Similar to a personal loan, obtaining a business loan involves submitting an application to a lender who evaluates whether they will extend the loan to your business and at what interest rate. Upon accepting the lender's offer, you'll receive the approved loan amount and commence repaying it, along with interest, on a monthly basis over the agreed loan term.
Eligibility for the loan depends on various factors, such as your established trading history, cash flow position, and credit history. These factors collectively determine the likelihood of your loan application being approved.
CAN YOU OBTAIN A BUSINESS LOAN WITH BAD CREDIT?
Individuals or businesses with a less-than-ideal credit history may encounter challenges in obtaining loan approvals. For those seeking business loans despite poor credit, the offers they receive may come with high-interest rates due to the perceived greater risk to the lender. However, bad credit can be gradually improved by responsibly managing new debt and settling old debts.
Obtaining start-up business loans with bad credit can be particularly difficult, as small businesses are already considered risky by lenders, making those without a solid financial track record an even higher risk.
It is crucial to avoid applying for numerous loans, as this can further negatively impact your credit score. Each application, even if rejected, generates credit checks that get recorded on your credit file, indicating an urgent need for funds. This situation could lead to further rejections or higher interest charges.
HOW LONG DOES IT TAKE TO GET A BUSINESS LOAN?
The process of securing a loan can vary, ranging from just a few hours to several weeks. The duration it takes to secure a business loan is influenced by various factors, including the type of loan and the specific lender involved. Notably, secured loans generally require more time to arrange compared to unsecured loans.
HOW DOES IT WORK?
We keep our business finance options transparent - no hidden fees or nasty surprises. This is business finance made easy. Our no-obligation application won't impact your credit score.