It is common for a business owner to have to borrow money in some form for many different reasons. A business owner could have start up costs that need to be paid to get their business running. Some may need working capital to keep cash flowing. Another reason may be to make a worthwhile investment for the sake of your business. Or you may just want to you business assets rather than personal savings to reduce your professional risk. No matter what the reason, there are resources available for businesses, particularly small businesses, to take out loans.
Business loans can either be secured or unsecured business loans. This simply means that they can have some sort of collateral backing them up.Secured loans are those loans that are protected by an asset or collateral of some sort. The item purchased, such as a home or a car, can be used as collateral, and a lien is placed on such item. If you don’t pay off your debt, they will take the item you have put forward as collateral. An unsecured loan is a loan that is issued and supported only by the borrower’s creditworthiness, rather than by any type of collateral. Borrowers must generally have high credit ratings to be approved for certain unsecured loans.
If you do not have the assets to put up as collateral, than unsecured loans may be the debt product meant for you. Before going that route you may want to look into the pros and cons of an unsecured loan.
There are a number of reasons why business owners choose to go the route of unsecured loans.
The first positive of this debt instrument is that there is no asset risk. This essentially means that you are not putting up anything to get the loan. Some loans may require your home equity as collateral, or even your car or business. If your loan is not paid, creditors take those assets in order to pay off your debt to them. With an unsecured loan you are not required to put up any collateral for the loan. Your creditworthiness and income are the basis of obtaining the loan, not your car, home, business, etc. This can be a positive for people who do not have much to put up for a loan.
Another positive for unsecured loans is the repayment term. Secured loans tend to be for many years. When it takes such a long time to repay a debt, it often means that there are high amounts of interest paid as well. Unsecured loans tend to have a shorter repayment term and therefore a lower cost in interest over time.
Just like any comparison list, there are cons that go along with the pros. Why would someone select a secure loan instead of a unsecured loan?
The first and most obvious reason is that unsecured loans are harder to obtain. With a secured loan you must have assets to put up as collateral, but for unsecured loan you need more. You need to have good credit and good income stream. This seems simple but to some it can be hard and often bad credit or consistent positive income takes many years to rebuild once broken.
Using a unsecured loan seems like it could be so beneficial, why would you put up your own assets and personal items on the line if you don’t need to? However, an unsecured loan is not so easy to obtain and the amounts allocated are not as much as a secured loan. As previously discussed, many business owners need money and often large amounts of it. Since the unsecured loans do not have assets as collateral, the amounts given are often less than those of secured loans. This is because, obviously, the secured loans have the value of the collateral behind it.
Since an unsecured loan does not have the backing of collateral, they often have a higher interest rate. The higher the risk the higher the interest rate. Obviously people do not want to pay a large amount in interest. It is best for you as a business owner to review what you need and what works best for you. Does your business require you to obtain an unsecured/shorter repayment term/higher interest versus secured/longer repayment term/lower interest. Just like everything there are plus and minuses to both.
It is best to review the plus and minuses of secured vs. unsecured loans. Hopefully the above article introduces you to them and allows you to make the best decision for you and your business.