As a small business owner, it’s important to understand the distinction between ‘secured’ and ‘unsecured’ when searching for financing.
Whether a loan is secured or unsecured can impact the terms of the loan and what happens if you default on the loan. Although it’s an important consideration, many lenders are not upfront on whether they are providing a secured or unsecured facility.
As a small business owner looking for finance, it’s important to understand this difference and ask potential finance providers if their products are secured or unsecured.
Secured Business Loans
A secured business loan means that you need to offer collateral alongside your repayment. Collateral, or security, is anything of value the lender can easily sell to satisfy your debt, should you default. Therefore, by offering collateral, business owners afford lenders a way of knowing they can collect on the balance of the loan if anything goes wrong.
There are many different forms of collateral – ranging from inventory or equipment, to your own home. By offering collateral, the lender has a way of collecting if you default on the loan and as such, secured loans can sometimes come at lower rates.
However, the downside is that if you default on the loan, you lose the collateral itself. Additionally, lenders often give lower value to collateral than a borrower or appraiser would. This may mean that whatever you put up as collateral will be exchanged at a lower cost than it is worth.
Unsecured Business Loans
An unsecured business loan is when the borrower doesn’t need to offer collateral or a compatible form of security to the lender. These loans take other factors into consideration when determining risk, such as the health of your business, credit ratings, reputation and other data. Given the lack of security in the event of default, unsecured loans can come at higher rates than secured loans.
Next time you’re looking for financing, be sure to ask potential lenders whether they offer secured or unsecured loans. Read your loan documentation carefully to ensure that you understand the terms and conditions, as it is often not clear upfront if you’re going into a secured or unsecured loan. It’s an important part of your dialogue with your lender and will likely help you determine which financing choice is right for you.
OnDeck offer short term loans from $10,000 – $250,000 over 6-24 month terms. While OnDeck does not take security over your assets, we do require a director’s guarantee.