Secured vs Unsecured Business Loans: What’s the Difference?

When seeking funding for your business, you’ll probably come across business loans. Offered by both government-backed banks and private lenders alike, business loans are among the most common type of funding vehicle used by businesses. You can get loans as small as $5,000 or as big as $500,000 — sometimes even larger. Not all business loans are the same, however, and it’s important to consider whether it’s secured or unsecured.

Unsecured Business Loans

An unsecured business loan is money loaned to a business that doesn’t require the business to use collateral. When you apply for an unsecured business loan, the lender will run a credit report to see if there are late payments or other delinquencies. Additionally, the lender may evaluate your business plan to further gauge your ability to pay back the loan. If you meet the necessary criteria, the lender will approve your application and give you the business loan.

Secured Business Loans

A secured business loan, on the other hand, is money loaned to a business that does require the business to use collateral. Some lenders are skeptical of loaning money to businesses, especially if those businesses have bad credit or no credit. Rather than rejecting their application for a loan altogether, lenders may require the use of collateral to secure the loan. Collateral is essentially something of value that the lender can use as a financial recourse in case the business is unable to pay back the loan. Common examples of collateral include real property, business equipment or even accounts receivables.

Which Should I Choose?

Now that you know the difference between unsecured and secured business loans, you might be wondering which funding vehicle is right for your business. There are advantages and disadvantages to both types of business loans. Unsecured loans don’t require the use of collateral, so you don’t have to worry about losing those assets if you fail to pay back the loan. On the other hand, unsecured loans are more difficult to obtain because they have a higher risk for lenders.

Secured loans are easier to obtain, and in many cases, they are the only option available for new businesses that are just getting off the ground. The problem with secured loans, however, is that you may lose any assets used as collateral if you don’t pay back the loan.

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