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Know Your Funding Options: The Risks Of Unsecured Vs. Secured Business Loans

Typically for most businesses,  a loan is needed at some point or other to keep the cash flow steady and the company thriving. Loans are a great way to aid your business’ growth and allow you a range of exciting opportunities or solutions to any financial problems that have cropped up: with an efficient business loan, almost any enterprise can see immediate growth as long as they use the additional capital wisely, see other advantages here.However, there are of course some potential risks attached. Before opting for any type of loan, you should do your research thoroughly, be aware of what each type of loan entails and know which is going to be most suited to you, to avoid getting into a sticky situation. When getting yourself set up with a business loan, you will have to decide between an unsecured business loan, and a secured business loan. There are of course key differences between these two funding options, and knowing these key differences is essential in helping you determine which will be most suited to you and your company.

So what is an ‘Unsecured Business Loan’ then?

An unsecured business loan is a loan that can be made to you without it being secured against any type of collateral. In simpler terms, it isn’t backed up by any asset, such as equipment, stock, property or land. As such, the lender has no guarantee of the money being repaid, so interest-rates do tend to be slightly higher than with a secured business loan. The amount you are able to borrow also tends to be lower, and they are paid back over a shorter period of time.

Generally, unsecured business loans for larger sums of money are only a realistic option for businesses with a very good cash flow position, so whilst it is possible to acquire larger sums of money through an unsecured business loan, it isn’t easily done. A long trading history, and an ability to prove stable financial growth is wanted by most lenders, so they are able to justly assess whether or not you will easily be able to repay the loan. An unsecured business loan is ideal for any business owner who is looking to borrow more than what their assets are worth, a relatively small sum of money, or for anyone who would simply prefer not to secure a loan against their valuable assets. There are a number of benefits involved in opting for an unsecured business loan: they are almost always much quicker to apply for and receive, as no valuations of your offered collateral is required and the legal process is also much more straightforward.  If you are in need of extra cash flow right away, this is much more ideal than having to wait about much longer periods for funding.

Furthermore, the initial up-front cost to your business is less, sometimes costing you nothing at all, and since not all businesses have the “asset spread” to secure themselves a larger, securedbusiness loan, an unsecured business loan proves to be a much more accessible funding option for many small business owners who are looking to borrow. A few examples of unsecured finance include working capital finance, short term cash flow loans, as well as merchant cash advances. SME Loans offers its borrowers both merchant cash advances, as well as unsecured business loans. The application process is quick, easy and can conveniently be completed online in the space of just a few minutes. 

And ‘Secured Business Loans’ ?

With a secured business loan, you are expected to back the loan up against some sort of security. This can be any sort of valuable assets, as already mentioned, such as equipment, stock, property or land, as a few key examples. For this reason, a secured business loan is often also referred to as asset-backed-lending. Generally, they tend to be lower cost overall as interest rates are lower due to the fact that the lender has greater security in the loan being fully paid back. You are also able to borrow much greater sums of money with a secured business loan for that very same reason, which is ideal for anyone with big projects in mind, or greater cash flow needs. It is important to note, though, that the process of getting a secured business loan can take a much longer period of time as the legal process involved is much more complex and valuations of your offered collateral can also be very time consuming.

More upfront costs are also involved, such as legal fees, which not all businesses would be able to afford. Furthermore, you also risk the chance of your offered collateral being taken away from you if you fail to pay off your loan, so if you are thinking of opting for a secured business loan you must consider very carefully just how easily you will be able to meet the repayments. Take time to do your calculations thoroughly, or even meet with a financial adviser if you are still unsure about how affordable this loan type is for you.

Weigh up your options

There are pros and cons to both unsecured and secured business loans, however there are much greater risks attached to a secured business loan. For many business owners, the risk of potentially losing one’s property simply isn’t worth it, although for some it may be a feasible option that would allow you to borrow a much greater sum of cash. If, however, you are only in need of a smaller loan, an unsecured business loan is likely to be a much more accessible loan option for you, with the added benefits of being much quicker and less risky in terms of potential property loss.