One of the most frequent — and also among the most important — questions that we get from business owners who need additional funding is “what are the differences between unsecured business loans and secured business loans?”
Essentially, there are three fundamental distinctions between these two types of business loans:
1. Pledging Collateral
The biggest difference between unsecured business loans and secured business loans, is that the latter are backed (i.e. secured) by collateral, which can be physical assets such as buildings, equipment and vehicles, or financial instruments like securities, cash, and so on.
In the event that a borrower breaches the loan’s terms and agreements — which can include missing a payment — the lender can take possession of some or all of the collateral, and liquidate it to cover the debt.
Of course, this doesn’t mean that borrowers don’t have to pay back unsecured loans; obviously they do! However, in the event of a missed payment or other material agreement breach, the lender must attempt to recover the debt through collections, which must follow procedures as prescribed by law (including registered letters notifying borrowers of impending action).
What’s more, many borrowers do not have enough collateral to obtain a secured business loan — especially since it is lenders who determine the value of pledged assets vs. borrowers. For example, industrial equipment that is easily worth $50,000 may only be valued by banks at $25,000.
2. Total Cost of Borrowing
Another difference is the total cost of borrowing. Since lenders who offer unsecured business loans take on more risk, the total cost of borrowing is relatively higher vs. secured loans.
However, the amount of this spread varies, and in some cases it is significantly less than some borrowers have been led to believe. This is because most banks and other lenders oblige borrowers to pay for collateral valuation, and there can be other fees as well.
3. Application Time
The third key difference is that unsecured business loans, because they do not require collateral valuation, are much simpler to administer than secured business loans. For example, an unsecured business loan application can be approved in a day, and cash can be made available within a week. Alternatively, secured loan applications can take several weeks or even months to put together.
At National Business Capital, we offer a full range of unsecured business loans for borrowers across all industries, sectors and marketplaces. We review all applications within 24 hours, bad or impaired credit is typically not a deal-breaker, and we only need to see a few months of business history vs. a few years — which is what banks typically require.
To learn more, contact us today or complete our two-minute application. We’re available 24/7/365, and would be honored to see how we can help be part of your business success story!