Unsecured vs Secured Business Loan: Which One Is Right for Your Business?
A growing business has growing capital requirements as well, which is often fulfilled by borrowing funds that come in different forms.
It’s important to understand the difference between a secured and an unsecured loan for a business in order to make sure they are raising funds in a way that’s in line with their business goals.
Let’s understand these two types of loans in more detail below.
What is an Unsecured Business Loan?
An unsecured business loan, as the name suggests, is a type of loan that doesn’t require any type of “security” or collateral. The lender uses indicators such as the business’ health, cash flow, and credit rating to decide whether it qualifies for an unsecured loan.
What is a Secured Business Loan?
A secured business loan, as you can guess, requires collateral against the loan amount. This makes it safer for the lender as it comes with its own advantages for a business (which we will get to below). But not all businesses can get this type of loan due to not having enough assets to use as collateral for the loan amount.
Difference between an Unsecured and Secured Business Loan
There are some significant differences between unsecured and secured business loans. And as we said before, understanding these differences will help you make a more informed business decision when raising funds.
Let’s go through some of the major differences below:
As discussed above, the need for collateral is the fundamental difference between a secured and an unsecured business loan. While the former is always granted against the business’ assets, the latter doesn’t require any form of collateral.
This doesn’t necessarily mean that an unsecured loan will turn out to be a more flexible option for your business though, as it may depend on your business’ needs and whether or not it’s established enough to qualify for an unsecured loan.
That said, an unsecured loan can be one of the best funding options for growing businesses that have healthy cash flow but not a lot of assets to pledge.
As we just mentioned above, secured business loans come with a much lower interest rate than their unsecured counterparts. This is simply because the lenders are in a much safer position with a secured loan, as they can always leverage the business’ assets to recover the loan amount if the business fails to repay the loan amount.
On the other hand, an unsecured business loan leaves the lender in a much more vulnerable position as they wouldn’t be able to recover the loan amount in case the business fails to pay it back.
This is the reason unsecured business loans demand a much higher interest rate than secured business loans.
Hubbe is quite an exception here, though, as the interest rate for unsecured loans starts at just 9.9% per year, allowing growing businesses that are in good health to take a loan without getting burdened by super high-interest rates.
Again, as we mentioned above, a secured business loan allows you to repay the loan amount over a much longer period of time than an unsecured business loan.
It’s for the same reason that lenders charge a lower interest rate for secured business loans, which is a much safer form of lending for them. So they are more willing to let the business repay the loan over a longer period of time, thanks to the assets that they can always leverage to recover their loan amount if the business fails for some reason.
But with an unsecured business loan, the longer the duration of the loan, the more the chances of it turning a bad debt for the lender. This is the reason lenders want to get their loan amount back as soon as possible with an unsecured business loan.
Typically, secured loans allow a much bigger loan amount than unsecured loans, but not at Hubbe.
As we are focused on helping businesses fund their growth and expansion through us, we allow them to borrow up to $500,000 regardless of whether they opt for a secured loan or an unsecured loan.
The loan requirements are obviously much easier to meet for secured loans than for unsecured loans. As the lenders aren’t much concerned about the repayment due to enough assets of the business being pledged, they are much more willing to offer secured loans to businesses.
Unsecured loans, however, are different. A business typically needs to be fairly established, have a great credit history, and boost some strong numbers on its balance sheets to qualify for an unsecured loan.
A Quick Recap
Finally, after going through everything we discussed above, we can conclude that both secured and unsecured loans come with their own set of advantages and disadvantages.
So it comes down to your business’ exact capital needs, as well as where it stands in terms of growth and stability.