Difference Between Secured and Unsecured Business Loans

When you’re looking to take out a loan to help your business, you’ll typically have two main choices. You can apply for either a secured business loan, or an unsecured business loan.

There are pros and cons to each option and it’s important to understand the differences between them. To help, below you’ll discover the main differences between secured and unsecured business loans.

What is a secured and an unsecured business loan?

Loans are typically offered on a secured or an unsecured basis. A secured loan requires some form of collateral to the lender. This is usually a house for personal loans, or with a business loan, the premises, equipment or potentially even the business itself.  

Unsecured loans require no capital. They are simply lent to the business with the agreement the loan will be paid back over a set time period.

What are the main differences?

The main difference between a secured and unsecured loan, is that one requires collateral and the other doesn’t. However, there are some additional differences to be aware of.

With a secured loan, you’ll be able to borrow a lot more money than an unsecured loan. The interest rates are also a lot lower, meaning the repayments will also be lower each month. Lenders often allow much longer borrowing periods with secured loans too, giving you more time to pay them back.

Unsecured loans offer smaller amounts and they tend to offer flexible repayment terms. They are also a lot quicker to get hold of than a secured loan and they don’t incur the same level of charges as a secured loan. If you fall into financial difficulties, you’re not going to lose your business or any equipment.

How to determine which one is right for your business

It’s important to ensure you’re choosing the right type of loan to suit your business. If you’re looking to secure a large sum of money and your business is fairly successful, a secured loan could be the right option. On the other hand, if you’re just getting started or you’re looking for a safer, smaller loan, unsecured business loans would be the better option.  

You need to think about how much you need, the credit rating of the business, and how long you’ve been trading. It’s also important to assess your ability to pay back the loan.

Both secured loans and unsecured loans can provide a lifeline to businesses. However, it is important to understand the terms of each loan type before deciding which is right for you. Only once you know the advantages and disadvantages of each loan type can you truly make the best decision of which is right for you.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.