While there are dozens of different types of business loans, most of them can be classified as secured or unsecured. Secured business loans are those backed by collateral. You’ll have to provide the lender with collateral to obtain them. Unsecured business loans are not backed by collateral. Before applying for a secured business loan, you should weigh all of the pros and cons.
Pro: Doesn’t Require Good Credit
You don’t need good credit to obtain a secured business loan. Lenders pay little or no attention to credit scores when evaluating applications for secured business loans. You don’t need good credit, nor do you need any credit, in fact. You just need to provide the lender with collateral.
Pro: Low Interest Rate
Both secured business loans and unsecured business loans come have an interest rate. The interest rate is an added fee on the principle of the loan that’s baked into the payments. Secured business loans, though, typically have a lower interest rate. You can expect to pay less in interest fees over the term of the secured business loan.
Pro: No Equity, No Problem
Secured business loans don’t involve any equity. Equity represents ownership in a given business. You can use it to obtain financing from investors. Known as equity financing, it generally involves selling an ownership stake in your business to one or more investors. If you want to retain full ownership of your business, you should choose a secured business loan. Secured business loans don’t involve any equity.
Con: Requires Collateral
While you don’t need good credit to obtain a secured business loan, you will need collateral. All secured business loans require collateral. After all, collateral is essentially what distinguishes them from unsecured business loans. Different lenders may accept different types of collateral. You might be able to provide them with property deeds, treasury notes and stocks. If you don’t have a sufficient amount of collateral — or if you don’t have the right type of collateral — the lender may reject your application.
Con: Potential Loss of Collateral
As long as you repay the secured business loan, you’ll get to keep your collateral. Problems can arise, however, if you fail to meet your payment obligations. Defaulting on a secured business loan will typically result in the loss of collateral. The lender will take ownership of your collateral.
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