Pros and Cons of Unsecured and Secured Business Loans

SMEs look for external sources of finance for a range of reasons.

You might be looking for a little bit of extra liquidity to see you through a transition, or a rough patch. Alternatively, you might have already run into difficulty, and you’re looking for a loan to get you out of it.

Given the breadth of options when it comes to financing, it can be difficult to work out which is right for you. This applies especially in the case of unsecured vs. secured loans. Let’s see if we can break down the distinction between the two and establish the merits and potential drawbacks of each.

Unsecured business loans

When you take out an unsecured business loan, you don’t need to put forward any collateral. This is advantageous for a range of reasons.

Pros

To begin with, you won’t need to risk any of your company’s assets in the event of a default. Since the lender won’t need to assess the value of your collateral, you can expect a fairly quick turnaround. This makes this sort of loan ideal for smaller businesses that don’t have many assets available to put forward.

Cons

When a lender offers an unsecured loan, they’re assuming a greater level of risk. This will inevitably be reflected in the interest rate you’re asked to pay, and the amount of money you’re allowed to borrow at any given time. Your eligibility for an unsecured loan may also be influenced more by your credit history.

Secured business loans

In the case of a secured loan, you’re putting forward business assets as collateral. This might include your premises, equipment, or other items.

Pros

There’s less risk of your being burdened with a debt you can never repay since the lender will simply seize the agreed-upon collateral instead. This makes this kind of loan easier to qualify for, for the reverse reason that unsecured loans are difficult: namely, that there’s less risk for the lender. For much the same reason, you might find that you can find a lower interest rate here, which might make this form of financing more affordable in the long term.

Cons

If you fail to pay, the items you’ve put up as collateral can be seized by the lender. You should also consider that a failure to repay will have a long-term effect on your credit rating, and thus your ability to borrow in the future.

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