Business Funding – the Secured or Unsecured Loan Option?
Funding a new business venture can be tricky at the best of times. Even when you are confident you will qualify for a loan, there are various different lending streams to choose from.
Assuming both options are available, you may be wondering whether secured loans or unsecured loans are the best choice for your business.
What is a Secured Loan?
A secured loan is a financial product that is secured against the assets of the borrower – usually their home or another property. The value of the property is used as an insurance policy against the loan, with the lender taking possession of the borrower’s assets in the event of non-repayment.
Secured loans are available in a variety of forms, including mortgages, bridging finance and specialist business loans.
What is an Unsecured Loan?
By contrast, unsecured loans are issued with no security required on the part of the borrower. Instead, eligibility is determined by way of the applicant’s financial status, credit history and so on.
Unsecured loans are usually available in smaller sums only – typically less than £10,000 – and are issued subject to extremely strict lending criteria.
The Benefits of Secured Loans
When comparing secured loans vs. unsecured loans there can be advantages in a number of ways – primarily due to the fact that there are no upper-limits regarding how much can be borrowed. Just as long as the applicant’s assets cover the total costs of the loan, they can access as much as they need for almost any purpose.
In addition, a flawed credit history or the inability to provide proof of income will not necessarily affect your eligibility for a secured loan. Again, it is primarily a case of providing sufficient security to cover the cost of the loan with your existing assets.
As secured loans are considered comparatively low risk, they can also be offered with much lower rates of interest and overall borrowing costs than unsecured loans. The application process itself can also be much quicker with a secured loan, as fewer background checks need to be carried out.
The Drawbacks of Secured Loans
On the downside, failure to repay a secured loan as agreed could result in the forfeiture of your assets. A secured loan agreement includes a provision whereby the lender is legally entitled to take possession of your property – usually your home – if you fail to repay your loan as agreed.
Another drawback to secured business funding is the requirement of sufficient assets to cover the costs of the loan in the first place. Unless you can provide security that the lender considers acceptable and of the required value, you cannot and will not qualify for a secured loan.
If you have the necessary security to qualify for a secured loan and are 100% confident in your capacity to repay the loan, it could be the more accessible and cost-effective option. It is also important to acknowledge the fact that if you fail to repay the loan as agreed, you may lose your assets entirely.