Are you thinking of taking out a business loan? For new businesses trying to get off the ground, loans can be an important source of funding. And when taking out a business loan from a bank, you will typically be faced with the choice of an unsecured or secured business loan. So, which is better? When you compare business loans both have their perks and downsides, and in this article, we’ll take you through them:
Benefits of an unsecured loan
An unsecured loan can be better for businesses who choose to borrow smaller sums. They can be a way to take out a loan without being left with significant debt. That’s because the minimum amount for unsecured business loans is typically lower than for secured business loans. And if you are looking for flexibility, unsecured business loans can also be the way forward. That’s because you can expect up to five years to pay back the loans, if you want to take a longer-term option.
Then there is the processing time for unsecured loans, which are typically much faster than for secured loans, as there is no collateral such as a property involved. Records such as credit history and cash flow can be used for processing.
Disadvantages of unsecured loans
Because unsecured loans represent a greater risk for the lender, in general they can be seen as less likely to be approved. If you want the peace of mind which comes with a loan you are more confident will be approved, it might be better to look to secured loans. If you do not have a positive credit rating or sufficient trading records, this might make an unsecured loan unrealistic.
And if you are a start-up looking for funding to launch, depending on your costs, the money which you can expect from an unsecured loan might not be enough.
Benefits of secured loans
Secured loans can make the most sense if you require a large injection of capital. This can often be required at the start of a company’s journey, and enterprises can also find that secured loans are the best bet for long term business plans. If your strategy for growth is likely to take a number of years, the extra leeway for repayment you can enjoy from secured loans can be welcome. The smaller repayments will free up more cash to use in other areas of your business as you develop.
Disadvantages of secured loans
With a secured loan, there is some level of risk attached that you could lose your asset, such as a property. Depending on the terms of the loan, just one or two mis payments might put your asset at risk, and you can also expect charges to be incurred if you miss repayment dates.
You can also expect more fees to be attached to the processing of a secured loan. The preparing and presenting of the official documents – for purposes such as proving your assets – can also take time to arrange.
The type of business loan which you decide on will come down to the nature of your business strategy over the short to long term. It is absolutely vital that you lay out your business plan in detail before you consider business loans.