Secured or Unsecured Funding for my Small Business?

What is a secured loan?

A secured loan is a debt that has collateral, meaning that an asset is put on the line if the debt fails to get repaid. Sometimes this is known as a homeowners loan, but it can in fact be all sorts of assets that are used as bargaining chips to gain funding: cars, equipment, land, and so on.

The amount you borrow can be dependent on these assets, as they will be entitled to be repossessed upon failing to meet repayments. Usually, the asset has to be easily transferable, worth a significant amount and easily auctionable.

What is an unsecured loan?

An unsecured loan is available to borrowers without needing to put forward collateral. Generally, credit score thus becomes more important. An unsecured loan may print more small print in fact, so check if there’s early repayment fees or not. Usually, APR will be more reasonable when under $20,000 as there is less risk to the lender than with bigger loans. Unsecured small business finance options are often the only options for lenders, as they’re both versatile and have fast funding.

When a secured loan is the right choice:

Credit score is less important

Even though secured loans are somewhat synonymous with bank loans, which usually have high standards of creditworthiness, secured loans in and of themself are actually more forgiving regarding credit score. It makes sense that you’re open to less-than-perfect credit borrowers when you have a guarantee of an asset.

Lower APR

Similar to the logic above, risk is lower so the cost of the loan is also lower. This is why secured loans are more important when dealing with long term loans, because the interest repayments will be cheaper than an unsecured loan.

Large and long-term loans

Secured loans tend to be larger, and more long-term loans. Fixed, infrequent repayments over a long time span is easy to forecast, making it more manageable to assess leveraged investments and their viability. It also means that these loans are more equipped to fund long-term expansions, scaling up and investments.

When an unsecured loan is the right choice:

Faster

Large companies who are looking into long-term investments may be able to wait around for 3 months on a verdict from a bank loan — but many cannot. Sometimes, when you need some cash, you need it right away. Unsecured loans from alternative lenders can approve and fund in a matter of hours.

Widely available

Unsecured bank loans tend to also be more widely available in terms of eligibility. Generally, unsecured loans are aimed at those who can't put forward security, as opposed to not wanting to. Thus, they're often aimed at customers in a difficult financial situation, who are only looking for a modest amount, and thus flexible approval requirements has become the main USP/competition.  

Shorter loan terms

Unsecured loans tend to have shorter loan terms than secured loans for various reasons. Firstly, without security, loans aren't so large, and thus makes sense for them to not be long term. Secondly, those looking for alternative lenders for fast funding aren't so concerned about having a long term loan as the APR is higher. 

Not at risk of losing your home

The collateral asked for when securing a loan isn't something small, like a few rings and you'd TV. It's stuff that holds significant value, such as your car, your home or some land. If you were to be repossessed of any of these things, it could severely impact your personal life. Thus, unsecured loans help give you some protection by keeping the business and your home separate.

Final Word

You may have gotten the idea that unsecured loans are only for those in desperate need of making ends meet. This is not true. They can very much be proactive loans for investment and expansion as opposed to reactive. However, there's usually a time element of needing the money quickly, otherwise a bank loan would be more suitable. 

If there's no rush but you have a credit score that's not very good (i.e. 560), then an alternative lender offering unsecured loans may just be your only option anyway. Lastly, it is also down to whether or not you want to put forward a personal asset, because usually separating business from your personal life is preferred.