I Need a Loan! Which is Better: Secured vs Unsecured?

May 17, 2023 EC Funding

At last, you were able to land that big contract that can take your business to the next level. You’ve some capital to complete the project, but in order to grow you need additional capital.

You might already have lines of credit, credit cards, but that isn’t enough. You’ve considered getting a loan.

What type of loan should you get? A secured or unsecured loan? These loans might sound the same but they aren’t.

If you’re reading this it means that you’re looking to get a loan. Confused where to start? We have you covered.

To learn the difference between secured vs unsecured loans, read on!

How Can You Get Your Business Loan?

Before we go into the differences between secured and unsecured loans, we’ll tell you how to get your business loan. What documents do you need? What is the process?

To get a loan for your business, you’ll need to apply and submit the paperwork requested by the lender. It’s a simple process as different lenders take less time to fund the loan than others. A loan will produce the cash to expand your business.

Every lender and loan has its own requirements. Be ready to submit the last 3 to 6 months of complete business bank statements and your credit application.

Once you submit this information, the lender’s processing department will analyze your case. You’ll be informed by the lender if you need to submit any additional information in order to get approved.

Not all loans work in similar ways, it’s smart to do your own research before applying. This way, you can be confident the loan fits your business needs.

Secured vs Unsecured Loans

Two of the more popular types of business loans are secured and unsecured loans. They might sound the same, but they aren’t. To grasp the differences between them, we must distinguish both types.

Unsecured Loans

An unsecured business loan is a loan given based only on the creditworthiness of the applicant. In this case, the lender will ask for your details and wouldn’t require collateral.

Most of the time the receipt, and approval of the loan is based on your credit score. Other types of unsecured loans are business lines of credit, credit cards, term loans, invoice financing, and merchant cash advances.

Secured Loans

A secured loan is a loan backed by an asset. This asset is what determines how much money the lender is willing to lend the applicant. The asset serves as a guarantee of payment to the lender.

If the debtor defaults on the payment of the loan, the lender takes the asset that backed the loan. The type of unsecured loan depends on the asset produced.

Secured loans are collateral secured and personal guaranteed. The difference between these loans are what backs the loan.

When acquiring a secured loan with your personal assets, your belongings are put on the line. If your business venture fails or unable to pay the loan, the lender has the right to seize the assets and you’ll lose them.

How Are They Different?

You might be thinking you know the differences between these loans already. Yet, there are more differences between them than just asset backing. The main differences between secured and unsecured loans are:

1. Risk

When it comes to risk, unsecured loans win in this category. Remember that to get a secured loan, you’ll have to put your assets of comparable value on the line.

This means that if you default on the loan, the lender will seize the asset including personal assets. In contrast, if you received an unsecured loan it’s guaranteed that none of your assets are risked or tied to the loan.

2. Rates

Loan rates depend on the risk including creditworthiness, depending on the loan you’re acquiring. A secured loan translates into minimal risk for the lender, so they provide slightly lower rates than unsecured loans.

When qualifying for a secured loan, the rates run as low as 4%. You’ll have more on the line due to the nature of a secured loan being asset backed. Something to think about.

3. Terms

Realize that every loan has their individual terms and conditions. The rule of thumb is that secured loans win in this category as well.

The asset that backs the secured loan gives the lender assurance of payment. This translates into flexible terms, easy payment, fewer fees, and penalties. In contrast, unsecured loans commonly have additional strict terms, higher fees and, penalties for early repayment.

4. Requirements

When evaluating the requirements, unsecured loans win it all due to its flexibility. Secured loans have extra strict requirements. When talking to a lender, they typically require you to be in business for a minimum of 2 years, good credit score, earn a satisfactory amount of revenue such as exceeding $95,000 annually, among others.

An unsecured loan may require a healthy amount of revenue. It is determined to be a smaller amount based on the lenders requirements. If you’re applying for this type of loan, you’ll need to have a decent credit score as well.

Yet, if your business is in good standing or you have a solid business payment history, you are apt to get approved easily and in no time.

Wrapping It Up

Now that you know the difference between secured vs unsecured loans getting the funding you need to increase your business revenues will be easier. Remember that not all lenders are created the same, so shop different types of lenders prior to applying for your loan.

Decide what type of loan to apply for based on where the money is needed and your risk tolerance.

A good starting point is to discuss the areas of your business that is ready for funding with a dedicated loan specialist. Don’t forget to accumulate all the important questions to ask the lender. That way, your eyes are wide open when discussing the future of your business.

Which do you identify are incomparable to serve your business, secured or an unsecured loan? Our loan specialist is able to guide you to a profitable future.

If you have any questions on how Working Capital can help your cash flow or to learn more, please give us a call at 888-513-9937.