If you’re considering borrowing money for your business, one of the most basic questions you need to answer is whether you want to get a secured or unsecured business line of credit. Each loan type has its own advantages and disadvantages.
Secured loans are obtained by pledging some asset you or your business owns. The main advantage of a secured loan is that it usually carries a lower interest rate than an unsecured loan. You are putting up something of value against the loan — your business equipment, your warehouse, your home — so the lender feels less nervous about whether you will pay the loan back. For this reason, they’re willing to lend the money at a lower interest rate.
For the most part, you can obtain a larger loan if you are willing to secure the loan with an asset.If you have credit problems, you may need to get a secured loan, as it will be difficult to find a lender willing to trust you with their money otherwise.
On the plus side, having a secured loan can help you rebuild your credit. As you make regular payments, that will be reflected in your credit report and help build your credibility as a reliable lender.
However…if your business fails to pay on the loan, the bank will seize the asset — your business equipment, your home, your vehicles — and sell it to pay off the debt. If you get more than 30 days overdue on your loan, you may see this delinquency start to show up on your personal credit rating.
Many business owners are hesitant to get a secured loan and put their valuable assets at risk, especially their own home. You could be out on the street!
An unsecured business loan do not require that the business owner put up an asset to guarantee the loan payment. These are also sometimes called “signature loans.” The lender is relying on your promise of repayment. Usually, unsecured loans are for smaller amounts than secured loans, and often are for shorter time periods than secured loans.
Unsecured loans ordinarily carry a higher interest rate than secured loans. Despite this, unsecured loans are far preferable for many business owners, as they do not want to take the risk of losing a valuable asset if their business runs into trouble and can’t make loan payments.
Would you rather pay a little higher interest rate and not risk losing your home or other valuable asset? Yeah — me, too.
Although times are changing and there are more exceptions to this rule than ever before, an unsecured loan often carries a cheaper interest rate than the business owner would pay if they simply used a credit card to finance their business spending. So it’s worth the time to explore whether you could get an unsecured loan for your business.
One final point to consider: Generally, the number of available unsecured loans is more limited than the number of unsecured lines of credit. That simple fact can often make a line of credit the better option to pursue for many small-business borrowers.