It’s two words you’ll hear a lot once you start shopping around for a loan for your business – ‘secured’ and ‘unsecured’. But what do they mean? Fundamentally, a secured loan is one in which the borrower pledges some asset as collateral – a thing to be forfeited in the case of default or inability to pay off the loan – and an unsecured loan is one in which no collateral is offered. There are different advantages to both, so even if you qualify for both it can be prudent to choose one over the other. Read on to find out.
Helping you build your business
A secured loan requires assets, and generally offers a lower interest rate to the borrower than an unsecured loan. However, it’s normally the businesses that most often lack assets – start-ups – that require a loan to get started, so these companies usually turn towards an unsecured loan.
This is not necessarily a bad thing, however – an unsecured loan is a great idea for any entrepreneur with a strong business plan that they know will be able to generate money within a set amount of time. They’re fantastic for helping organisations acquire plant and machinery, get their first piece of real estate, or source necessary materials for a first order – anything that directly contributes to the business’ beginning. Also, if you have a good credit history and a proven ability to repay debts, you’ll have more options available in terms of interest rates, so not having real estate or other valuables to offer up as collateral does not mean you’ll be locked into a higher rate.
The right loan for the right company
Your business’ specific capital needs and unique circumstances will ultimately determine the loan that’s most suitable to you. Where companies require a quick injection of capital to pounce on some rare opportunity, an unsecured loan offers flexibility and convenience. Especially useful for start-ups with minimal capital, they can provide that all-important first push to get you off the ground.
For more established organisations with more assets to their name, a secured loan may be more acceptable. If you’ve been in business for a while and are looking to expand your operations, branch out into new markets or develop a new product adjacent to your current core business, a secured loan gives stability and – generally – attractive interest rates and repayment methods.
Whatever your goals, start a discussion with a loan consultant to find out what the best path forward is.