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Secured and Unsecured

If you are going to go to a bank and try to get a loan, one of the things you have to determine is whether or not you are going to offer collateral on your potential loan or not. The following is a great break down of the differences between secured and unsecured loans, and what they will mean to your business should you get funding that is secured versus getting funding that is unsecured.

First, let's look at collateral-
A secured loan by definition is a loan that has collateral. It is a loan that is secured by putting something of value equal to that of the loan amount. It is secure for the bank or lender to make the loan because should you fail to repay the loan, they have something to take and regain their investment with. In other words, if you default, they aren't left with nothing. Depending on the lender, the collateral amount may need to be greater than the loan value. The main reason for this is that in order for the lender to liquidate the collateral you put up, it may cost them something, thus the collateral would need to be equal to the loan, plus the amount it would require to liquidate the collateral. For example, if your business owns its building or retail space, and uses it as collateral, should you default, a lender would have to sell the building to recap their cost.

Unsecured loans are loans given without the security of collateral, and instead are based on the credit worthiness and financial strength of the borrower. In other words, does the borrower have a good credit score, and is their company financially sound enough to repay the loan. This is up to the lender to judge.

Second, let's look at loan terms-

Secured loans are in nature less risky for lenders, and thus they usually offer lower interest rates then other loan types. They also offer longer repayment terms, giving the borrower a longer period of time to pay them back, and thus smaller monthly payment amounts. In addition, secured loans can also be much larger than other loans, depending on the collateral provided.
Unsecured loans for businesses very rarely exceed fifty thousand dollars, and are typically short-term loans, meaning that they need to be paid back within about a year. Most businesses only use them as second-level funding. A company that gets an unsecured loan will likely need to show earnings exceeding $100,000 each year, and be in business at least two years in order to qualify.

Last, let's look at approval rates.
Secured loans are easier to obtain, which is naturally because they are less risky to the lender.

Unsecured loans are only available to established companies with good credit and strong financial records. If your company does not have this, they will not even be considered.

In summary, if you have the collateral to offer, a secured loan is easier to come by and offers better terms for business loans.

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