When it comes to applying for a business loan, naturally you need to identify key factors like amount, term, and total cost of borrowing. However, there’s another piece of the puzzle that is just as critical: whether the business loan is unsecured or secured.
What is an Unsecured Loan?
An unsecured business loan is funding that isn’t secured by assets or collateral. Instead, borrowers provide a personal guarantee that they’ll pay back the loan regularly, in full and on time.
What is a Secured Business Loan?
A secured business loan is backed by collateral. However, there’s more to the story here — and it’s essential for borrowers to clearly understand the commitments they’re making or risks they face before entering into a secured business loan agreement, not after.
To that end, here are 10 things borrowers need to know about secured business loans:
- The fundamental purpose of securing a loan is to lower the lender’s risk — not the borrowers.
- Collateral is not limited to business assets, but can also include personal assets (e.g. the borrower’s home, car, etc.).
- Some lenders insist on cash-secured loans, because they don’t want to liquidate the collateral.
- Some lenders insist on blanket liens, which essentially means they can seize any asset(s) related to a borrower’s business to make up for any missed payments.
- Banks and other lenders that provide secured business loans can — and often do — undervalue collateral, in order to further reduce their risk.
- Borrowers — not lenders — must pay up front fees for collateral valuation (and borrowers have no appeal or recourse if they don’t agree with the valuation, which as noted above is often much lower than fair market rate).
- Secured business loans are often pegged to variable interest rates, which means that payments will rise if rates go up during the loan term.
- Paying a secured business loan back early will not result in any interest savings. On the contrary, it will trigger penalties.
- Secured business loans usually take several months to set up.
- Successfully repaying a secured business loan doesn’t boost a business credit score as much as successfully repaying an unsecured business loan.
Is an Unsecured or Secured Business Loan Right for You?
It’s beyond the scope of this (or any other) article to definitively advise you on whether an unsecured or secured business loan is right for you. However, many borrowers who wisely perform their due diligence opt for an unsecured business loan because it’s more versatile and flexible than a secured business loan, and the application process much simpler, easier and faster.
To learn more, contact the National Business Capital team today for your free, no-obligation and zero pressure consultation. We’ll invest quality time to learn about your unique needs, clearly describe our unsecured business funding solutions, and help you make an informed decision that’s best for your business — even if that means you end up applying for a secured business loan from your bank or another lending source.
Or if you’re interested in applying for a loan, check out our two-minute application where you can get funding approval within 24 hours!
Also, be sure to check out our FREE eBook on how to get business funding when banks say no: