Secured and Unsecured

If your business is going to take a loan out, whether it is for equipment or overhead, or inventory, or something else entirely, it is important to understand the various loan options available to you. One of the most important aspects to consider is whether or not you are going to apply for secured or unsecured loans. They both offer benefits, but the cost to borrow varies, as well as the term, amount you can borrow, etc. Here's what you should know about secured and unsecured loans:

First, the basics. A secured loan uses collateral to minimize the risk to the lender. In other words, if you get a secured loan, you are putting something up for it. For example, if you get a loan to purchase equipment for your business, the equipment might be the security. However, the security can be almost anything, as long as there is something acting as collateral. Often the collateral amount for a secured loan has to exceed the loan amount, in order to cover the costs to liquidate the collateral, and defray the costs of a defaulted loan. An unsecured loan is just what it sounds like, it is a loan given to a business without any collateral from the borrower, the only thing to secure it is the credit worthiness of the person in question. Their credit worthiness is typically determined by looking at both their credit score, and the strength and financial history of their company.

Next, let's look at the terms of these loan types. When you get a secured loan, because it is less of a risk for the lender, as they have collateral, they will typically offer a lower interest rate to you the borrower. Thus, it costs less to borrow the money. The bank will also likely loan the money out longer, giving you a longer period of time in which to pay back the loan, which results in lower payments. Because these loans are based entirely on the collateral put up, the loan amounts can vary significantly, but can be very high if the collateral is high enough. An unsecured loan typically does not exceed $50,000, carries a far higher interest rate, and will typically be a short term loan,meaning it must be repaid within a year, or will be a revolving credit loan, that will remain open only as long as the payments are being made.

Who an get these loans? Because secured loans are les of a risk to banks, they are more available to business owners, which means that typically, as long as you have something that can be used for collateral, you can get a loan. However, unsecured loans are traditionally only offered to established companies who have been in business for at least a year, and have a history of cash flow, or a strong financial history. The business typically must exceed $100,000 a year in profits, to qualify.

Secured loans offer the best terms, and are the easiest to obtain, but also come with the risk of losing your collateral if you should be unable to pay the loan payment.