Secured vs. Unsecured Loans: What’s the Difference?
When you borrow from a bank or another person and promise to pay it back within a specific period, you’re taking out a loan. In some way, you’re reassuring the company or person to give back what you borrowed. Some may ask you to leave something valuable as a guarantee for the loan, while some may not. Florida business loans work in the same way.
If you’re looking to apply for any type of business financing, you must know that it may come in two types: secured or unsecured. While both loans serve the same purpose, which is to give you money for capital, they both differ from each other in some ways. Business owners need to understand the difference between the two as they may take advantage of it frequently as they continue to run their businesses.
What is Secured Business Loans?
With a secured business loan, you, as a borrower, need to pledge assets to secure the loan. In this option, you, by default, agree that a lender has the right to repossess the collateral if you default on the payments. Whether you used real estate properties, account receivables, or equipment, the lenders have the right to take it if you can’t keep up with the repayments. Keep in mind that even though the financing company repossesses your property, it doesn’t mean you’re cleared of debt. There are times when borrowers are still in debt even after the asset’s repossession.
Lenders usually sell repossessed properties to pay off the loans. However, if the value of your property doesn’t completely cover the amount you borrowed, you’ll be responsible for paying the remaining balance. Examples of secured business loans include equipment financing, asset-based financing, term loans, and invoice financing.
Secured loans are the most popular type of business loans that entrepreneurs apply for. Since it’s backed up by an asset, business owners can enjoy low-interest rates and may qualify for high borrowing limit. Aside from that, the repayment period for this type of financing is usually longer compared to unsecured loans.
What are Unsecured Loans?
Unlike secured business loans, unsecured financing allows you to borrow money without presenting any collateral. This means, lenders cannot seize any of your assets as payment should you default on the loan. Unsecured loan options include business lines of credit, bridge loans, or credit cards.
The loan amounts for unsecured loans may be smaller than secured loans. The interest rates may also be higher since the lenders are facing a big risk by releasing money without collateral to fall back on. Aside from that, you may need to have a good credit history and strong cash flow to increase your chances of approval.
if you’re planning to apply, you must prove to the creditors that you have the financial capacity to repay the loan. Lenders, in turn, will base your qualification based on the 5 C’s of credit, namely:
The Right Type of Loan for Your Business
There are multiple factors you need to consider before deciding between secured and unsecured loans. It’s easier to qualify for secured loans since there’s less risk for lenders. If you don’t have great credit or if you’re currently rebuilding credit, lenders may consider you for secured loans rather than unsecured. Furthermore, lenders typically charge lower interest rates for secured loans and they offer higher borrowing limits. This enables you to access more money than you would with an unsecured loan.
If you have the right type of assets to secure a loan, then it’s better to choose secured business loans because of its lower interest rates, easier qualifications, and higher borrowing limits. Just remember that if you fail to repay your loan, you may lose your house, car, or your business assets.
While you don’t have to use your properties as collateral for an unsecured loan, it can increase your debt load substantially if for some reason you are unable to make payments on-time.
Florida Small Business Loans for You
Knowing how and what type of Florida small business loans to apply for is an important step in achieving financial literacy. Having enough knowledge about the different types of loans will help you determine what to apply for in the future, should the need arise.
Choosing the right type of financing for your business depends entirely on your company’s financial situation. If you have enough assets to pledge, then secured business loans may be the right one for you. However, even if you have enough assets, you can still apply for an unsecured business loan. Either way, both types of loans can open up a lot of opportunities for growth and expansion for your company.