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.

The most common type of loan is unsecured business loans, but what exactly are unsecured loans, how do you apply, and how likely are you to be approved for one?  

In short, unsecured business loans are a type of credit agreement that does not require any collateral. The lender will send cash and will propose an agreement for you to pay them back with interest. The loan isn’t secured against anything, but a personal guarantee may be required, and interest rates are typically higher to account for the lack of security.

Flexibility vs cost

An advantage to unsecured business loans is that they are usually provided quicker than other types of loans and have the flexibility to be used for whatever business needs you to have. Whether you need to buy equipment, hire new staff, or pay off other business expenses, unsecured business loans are at your service. 

Unsecured loans are generally used for any purpose and are a smart way to pay expenses off while raising capital for your business - without providing security in the form of a property, which is one of the biggest risks with secured loans. 

Start-ups and unsecured loans

It can be difficult for start-ups to acquire unsecured business loans because they don’t typically have a lot of previous financial management information or credit history for lenders to assess, which can be seen as a risk for lenders. 

However, this doesn’t mean it is impossible. As long as you have a decent credit history (even if it’s not much) and can negotiate an agreement with your lender within a specific period, obtaining a loan shouldn’t be too difficult.

The application process 

When applying for an unsecured loan, applicants will need to have the previous six months’ bank statements, company accounts, and personal details as the business director at hand. Without these, it’s difficult to proceed with the application. 

With unsecured business loans, you can generally end your agreement early without paying any further fees or penalties, as long as you make the relevant payments towards your loan to reduce monthly commitments. 

The main thing banks or lenders will consider is your credit score, as this usually determines your ability to keep up with monthly repayments. However, as a business owner, you should always have the necessary documentation ready, and a clear business plan outlining the reason for the loan and a repayment plan. 

As no collateral is required for unsecured business loans, this type of loan can be considered one of the safest and speediest options for gaining cash for your business because there won’t be any processing time for your application. However, due to this ‘no collateral agreement’, lenders aim to reduce their risk by requiring business assets or personal guarantees.

Furthermore, interest rates are becoming more competitive in the unsecured business space, so flexibility becomes a key factor when considering what option works best for your business. 

Unsecured loans are a great, flexible way of securing finances that can help boost your business, you can speak to industry experts to help you understand if this is the best option for your business. 

Besides traditional bank loans, you can also go for personal loans from your credit union or online lenders, which tend to cater to a wide range of borrowers and come with less stringent requirements. The catch: you'll need to shop around for a personal loan that best fits your current financial situation. Personal loan terms, rates, and fees vary from one lender to another. Therefore, getting the best offers on a personal loan requires preparation and research. This is also why it's best not to jump on the first loan offer you get.

Personal Loan Application Tips

The following are valuable tips that can help you land the best loan offers in the market, especially when you really need a loan and have bad credit.

1. Shop Around

If you've checked with your bank or credit union or you've received a preapproved loan offer in your email, it shows a good start to the process. However, it's vital to know that the first loan offer you take a look at isn't necessarily the best. Shopping around will let you compare loan terms, interest rates, and fees from a wide variety of lenders. Many online lenders might even allow you to check their rates by making a soft credit inquiry that won't affect your credit score.

When shopping around for the best loan offer, letting the lender know what you're looking for will help you decide to take out the type of personal loan they are offering. The more lenders you compare, the greater your chances of finding the best loan rate and terms. Do your best to compare at least three options.

2. Improve Your Credit Score

If you don’t need the loan amount right now, it's best to boost your credit score. You can start by checking the status of your credit score. That will give you an idea of what you'll be working on. After knowing which areas on your credit score status need some work, you can start finding solutions. For example, if you currently have some delinquent accounts, do your best to get them current. Late payments usually stay on your credit report for about seven years - letting them go into collections or paying them even later can prevent further damage to your credit status.

3. Get a Co-signer

Several funding institutions that offer personal loans tend to accept co-signers from applicants. A co-signer is someone that serves as a guarantee for your personal loan. This should be someone with a good credit history and a stable income that can improve your chances of getting a loan at a low-interest rate. Before you sign someone up to be your co-signer, it's best to make sure they understand the obligations of being a co-signer. It's important to remember that co-signers are obliged to fully pay the loan if the borrower fails to do so. If there's missed or late payment, it will reflect on your co-signer’s credit report and eventually affect their chances of borrowing funds in the future.

4. Collateral

Most personal loans are unsecured. This means that they don’t require you to put up collateral. However, with some lenders, you can choose to secure your personal loan with a car, cash in savings account, or home equity. Secured loans imply low risk because if you fail to repay the loan, the lender can seize your collateral to pay for the debt. Because of this, secured loans tend to offer lower interest rates compared to unsecured loans.

5. Autopay Discount

Several lenders give interest rate discounts to borrowers who sign up for automatic payments. Because if you sign up for autopay, you'll more likely make monthly loan payments on time. Interest discounts for signing up for automatic payments are quite small. It's just 0.25%. However, this can help you save a chunk of money in the long run. Keep in mind that you should always have funds in your checking account monthly to cover the automatic payments. If you don’t have enough money, the lender might charge you a penalty.

6. Avoid Fees

The annual percentage rate of a personal loan pertains to the interest rate and several loan fees. One of the fees you should try to avoid is the origination fee. This type of fee usually ranges from 1 to 8 %  of your loan amount. Moreover, this fee is most likely deducted before you receive the loan funds.

In Summary

The first loan offer you get isn't necessarily the best. Personal loan terms, interest rates, and fees vary from lender to lender. To ensure that you are getting the personal loan you want, you should do your research and compare loan offers.