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Understanding the Difference Between Secured and Unsecured Small Business Loans

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Small Business Loans Come in Various Shapes and Sizes

Starting a business means many things, and the number one hurdle that must be jumped is funding. There are multiple ways to fund a new business, and while the best option is unique to the business and its owner, often the answer is a combination of more than one funding source. Some of those options will likely include small business loans.

While investors are a great option if can find willing participants, the fact is, most new businesses need some sort of financing either in lieu of or in addition to other funding options. The most common types of traditional small business loans are secured small business loans and unsecured loans.

To determine which one is right for you, it is essential to understand the differences between the two. The obvious difference is that a secured loan is anchored to some sort of collateral, while an unsecured loan is not. This security is there as a risk mitigation tool to encourage the borrower to make payments, and to offer some protection to the lender in the way of recouping funds if the borrower defaults.

If you don’t pay your loan, they take your collateral.

There are options, however. Unsecured loans for new businesses do exists. If you have no collateral, or do not wish to risk losing an asset, this is good news. You now have a choice and can make an educated decision, once you are educated on the details of each type of loan.

Cost

Generally, secured loans are more expensive on the front end, while unsecured loans are more expensive long-term, if you take the collateral out of the picture. If you default, and your home is the collateral for your business loan, that loan becomes incredibly expensive.

No one plans to default on a loan. There are other things at stake. A secured loan generally has a lower interest rate, but higher fees. Fees associated with verifying the value of the collateral and preparing paper work related to the security are not present in an unsecured loan.

A loan that is not associated with any collateral will not have those fees. However, since there is no collateral to mitigate risk, the lender will compensate with a higher interest rate. The true choice here is between a lower interest rate and reduced stress over losing an asset if the unforeseen occurs and you are forced to default.

Speed

While the loan approval process can be painstakingly slow regardless of the type of loan applied for, the added steps necessary to approve collateral makes the secured loan process much slower. The unsecured loan process, once started, can usually finish up much faster, resulting in receiving your funds more quickly. That is, after you find a lender that offers unsecured loans for new businesses. They do exist, but it will take longer to find one, and it is more difficult to gain approval for them.

Leniency

Lastly, though the bank carries a much larger risk with an unsecured loan, they tend to be more lenient with late payments due to unforeseen circumstances when there is no collateral involved. If there is security, a couple of late payments can mean they take possession. If there is not, they are often more willing to work with you in an effort to recoup as much money as possible.

Faith Stewart

Faith Stewart

Faith Stewart is a wife, mom, and freelance writer. She earned a BBA with a major in accounting and spent 10 years working in the fields of finance and accounting before pursuing her passion for helping small business owners and entrepreneurs through writing.
Faith Stewart