If you concluded that your business needs financing, the next step is to establish the type of financing you should select. A significant consideration is deciding between an unsecured and a secured business loan.
While there are plenty of loans available for your business, the most common types are separated into those categories. In this article, we will compare unsecured small business loans with secured small business loans to help you decide.
What Is the Main Difference Between Unsecured and Secured Small Business Loans?
The primary distinction between these two types of small business loans stands in the guarantee that is required. In the case of secured loans, a sort of collateral is mandatory, while an unsecured business loan doesn’t require one.
Secured Small Business Loans – Pros and Cons
The good thing about secured small business loans is that, although they do include collateral, they give you access to larger amounts of money. The lender takes a minimal risk when they grant you a loan since he/she acknowledges that the financial loss could be recouped if the loan isn’t repaid.
On the other hand, unsecured small business loans don’t offer great amounts of money, as they are riskier for the lender. In the same respect, these loans come accompanied by higher interest rates, for the same reason.
Another beneficial aspect of secured loans is that you can make repayments over a longer period, than in the case of an unsecured loan. That could also lower the amount you spend on monthly repayments. Since the interest rates are typically lower and the lifespan of the loan is longer, the repayments are lower. That could be a beneficial aspect especially for small businesses whose cash flow can be a challenge.
Worth noting is that if you have poor credit history, you are likely to get a secured loan. Lenders aren’t willing to facilitate unsecured small business loans to entrepreneurs with bad credit for the obvious reasons.
What about the disadvantages of secured loans? Apart from the fact that you have to secure the loan against a valuable asset, there are high upfront costs attached to it. Plus, some banks and lenders might require the payment of administration fees before your loan application is approved.
And last, but not least, secured small business loans can be challenging to obtain, due to the criteria required by most banks and lenders.
Unsecured Small Business Loans – Pros and Cons
What about unsecured small business loans? The good thing is that they offer flexible repayment periods, up to five years or so, depending on the lender, of course. As a general rule: the longer the repayment’s time frame, the lower the interest rate you’ll have to pay.
Evidently, another advantage is that you won’t put up your property as security. These loans are also suited for those who don’t require a large sum of money, which can be a disadvantage to some entrepreneurs.
Plus, they can be a challenge to obtain. If you don’t have a robust trading position in your domain, the odds are that your loan applications are likely to be rejected.
What Is Better for Me?
Now we’ll have a look at the scenarios in which you should consider taking out secured small business loans.
- You intend to borrow a considerable sum of money.
- You own a range of valuable assets you can provide as security.
- Your business is up-and-coming and successful.
- You have the financial means to make timely repayments for an extended amount of time.
When you borrow a sum of money against your assets, the loan will be secured by the value granted by the asset. Any of the following assets could be accepted by some lenders:
- Personal or commercial property
- Business equipment
- Art pieces
- Valuable appliances or musical instruments
- Another option would be to borrow against the value of your company.
Next, we’ll move on to unsecured small business loans: when is the right timing to choose one?
- Your business requires a quick cash injection.
- You own a small business with few valuable assets you don’t wish to place as collateral.
- Your company is quite new in the industry.
- You have the capability of repaying the loan over a period of three to five years.
In a nutshell, I couldn’t say that one type of loan or another is the best option for every Aussie entrepreneur. Your choice should be the result of research, considering the importance of such a decision. Make sure you check www.alcommercial.com.au, as our aim is to support your business by granting you the financial assistance you need for becoming more important and successful! We supply loans for all types of industries, and we facilitate flexible and diverse loans.