Difference between an Unsecured Business Loan and a Secured Loan

Here is everything you have to know about unsecured and secured loans. The difference between the two is not as obvious as it may initially seem. Continue to read more details about these types of loans offered by financial service providers like Fundygo.

Secured Business Loan

The “secured” part in a loan means your lender has some form of collateral to size, and if required, to resell, in the event you default on the loan. Because this loan is backed by collateral, it is considered less risky. Provided that you have collateral which has as much value as the money you are trying to borrow, you will be able to get plenty of money at extremely good rates. Well established businesses having a valuable asset, which they can pledge, can qualify for a secured loan, while both startups and smaller businesses typically are not eligible for it.

Pros and Cons of a Secured Loan

  • Loan terms and borrowing fees are more borrower-friendly than those of an unsecured loan.
  • A business borrower only stands to lose the items they put up as collateral for the loan.
  • A business loses whatever item it pledges in the event it defaults on the loan.
  • A secured loan is not accessible to businesses which do not have any considerable assets.

Unsecured Loan

An unsecured loan at its most essential form is one that is not backed by an asset. A lender will decide whether or not to lend you money based on the creditworthiness and/or the cash flow strength of your business.

It is more difficult to reclaim money if the borrower defaults on an unsecured loan, so it is riskier than a secured loan. The riskier a loan, the more it will cost the borrower. Expect to face higher rates of interest than what you would find on a secured business loan. Lenders will not wish to take too much of a risk on you, so expect access to fewer amounts of money.

While the loan is not attached to any specific asset, it may still need a personal guarantee. This refers to a deal stating that if the borrower cannot repay the loan any longer, whoever signed it is personally liable for paying back the remaining balance. If you own a general partnership or a sole proprietorship, you are personally responsible for paying back all business debts.

The Pros

  • It is easier to get an unsecured loan; a business can qualify for it even if it does not have any compelling assets.
  • You will not bear personal responsibility should you fail to repay the loan as long as it does not need a personal guarantee and yours is a limited liability company.

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