While various loan options are available for small enterprises, they fundamentally fall into two categories: secured and unsecured. A secured loan necessitates collateral, such as real estate, inventory, or equipment, to back it. Should you default on a secured loan, the lender has the right to seize the collateral and liquidate it to recover losses. Consequently, secured loans often offer more favorable interest rates than unsecured ones.
Conversely, an unsecured loan lacks collateral backing and relies heavily on your creditworthiness and other financial metrics to determine eligibility. Given the heightened risk for lenders, unsecured loans typically feature higher interest rates. Small business loans can be secured or unsecured, depending on the lender, the type of loan you choose, your credit score, and other factors.
As you stand on the precipice of seizing new professional opportunities and elevating your business, it is crucial to delve into the advantages and disadvantages of secured and unsecured small business loans. This exploration will equip you with the knowledge to make the most informed financial decisions for your enterprise.
Key Considerations
- Secured business loans necessitate collateral, which may encompass real estate, company vehicles, equipment, bank accounts, insurance policies, and other assets.
- An unsecured business loan, devoid of collateral requirements, often demands a high credit score and, in certain instances, a personal guarantee to ensure debt repayment should the business fail.
- The decision to pursue a secured or unsecured loan hinges upon the capital required to seize a given opportunity (secured loans typically provide larger amounts than unsecured loans), your personal credit score, your business’s revenue, and additional factors.
The Pros and Cons of Secured and Unsecured Small Business Loans
Secured Small Business Loans
Benefits
- Higher borrowing limits: Leveraging collateral can facilitate access to greater loan amounts. For instance, a secured commercial loan, such as a medical practice loan, secured with a lien on the business, may enable borrowers to obtain substantial funds for acquisitions, expansion, or enhancing working capital. BHG Financial provides large loan amounts up to $500,000.1,2
- Lower interest rates: Because lenders face reduced risk with secured loans, they typically offer more favorable interest rates on these loans when compared to the rates of unsecured financing.
Drawbacks
- Risk of losing collateral: Failure to meet payment obligations on a secured loan grants the lender the right to liquidate the collateral to recover the outstanding balance.
- Personal guarantee requirement: Some lenders may mandate a personal guarantee, obligating the borrower to personally ensure loan repayment if the business defaults.
Unsecured Small Business Loans
Benefits
- No collateral required: Eligibility for an unsecured loan hinges on your credit score, business income, and other financial indicators, rather than the need to provide collateral. Consequently, the lender assumes more risk with an unsecured loan.
- Expedited access to funding: Since there’s no need to validate or appraise any physical collateral, the process for getting an unsecured loan is typically quicker than the process for obtaining secured financing.
Drawbacks
- May require a higher credit score: Due to the elevated risk taken on by the lender, unsecured loans often necessitate a higher credit score.
- Higher interest rates: Unsecured loans generally carry higher interest rates than secured loans, with the most favorable terms available to applicants boasting the highest credit scores and strongest financial metrics.
- May have lower borrowing limits than secured loans: Certain lenders may place a lower borrowing limit on unsecured loans compared to their limits on secured loans.
How BHG Financial’s Small Business Loans Can Help You
BHG Financial offers secured commercial financing up to $500,0001,2, which you can use to reach your business objectives. Our lengthy repayment terms of up to 12 years1 mean you can consolidate business debt, buy equipment, make acquisitions, and expand your operations with affordable monthly payments. With access to our U.S.-based concierge service six days a week, you can rely on our dedicated team to serve your needs at every step.
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Secured or Unsecured Small Business Loan FAQs
Is it better to have a secured or unsecured loan?
The choice between using a secured or unsecured loan depends on your financial situation, including your credit score, business income, and access to business collateral. Secured loans may make sense for borrowers willing to commit collateral to back the loan, while borrowers with exceptional credit scores may be more comfortable with the terms and interest rate of an unsecured loan.
Are SBA loans secured or unsecured?
Small Business Administration (SBA) loans may be secured or unsecured, depending on the loan program and the size of the loan. Some smaller loans under $25,000 may not require collateral, while larger loans may require the borrower to leverage their home or other assets along with a personal guarantee of repayment.
What builds credit faster secured or unsecured loans?
Secured and unsecured loans can both help build credit if the lender reports payments to credit bureaus. Some lenders won’t report loan payments to credit bureaus as long as they’re paid on time, but missed payments and loan defaults may be reported.
Can a secured loan be written off?
Payments on a business loan are generally not tax deductible, but some businesses may qualify to write off interest on business loans. Before writing off any expense on your taxes, it’s important to consult with a legal or tax professional.
