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Home Business Financing: Secured vs. Unsecured Business Loans

 

Whether you are a new WAHM seeking start-up funds for your business venture or a seasoned professional in need of temporary financing, you probably have questions about secured and unsecured business loans. Each type of loan has its own requirements, as well as its own pros and cons.

Before applying for a loan, it is wise to educate yourself about both secured and unsecured loans, to see which one will fulfill your needs. Following is a breakdown of unsecured and secured business loans to help you in your decision-making process.

Secured Business Loans

Some business loans are given when the borrower can offer some form of collateral to the lender (in case she defaults on her payments). Simply put, collateral is anything you pledge against the value of your loan, and if you do not repay your loan, those assets are given to the lender to help defray the costs of your debt. Some examples of collateral include:

  • accounts receivable
  • equipment
  • inventory
  • house
  • car


Because the loan is "secured" by your promise of collateral, interest rates on secure loans are typically lower than other loans. They are also easier to obtain because they pose a lesser risk to the lender than unsecured loans.

If you decide to apply for a secured business loan, be sure that anything you pledge as collateral is something you are willing to lose should you default on the loan. Also, be sure to obtain an accurate estimate of your collateral items' value before you sit down with a lender.

Lenders generally give lower values to collateral than borrower's do, because if you default on the loan, these assets must be liquidated quickly, often for rock-bottom prices. So, if you have a recent assessment of your collateral's worth, you can more easily persuade the lender that your item has value.

Unsecured Business Loans

Unsecured business loans are given without any kind of security from the borrower. They are made strictly on the basis of your credit rating and other methods the lender uses to determine creditworthiness. Because these loans are unsecured, they inherently carry a greater risk to the lender. Therefore, they usually have a higher rate of interest than secured loans and are more difficult to obtain.

Most lenders require a "good" rating on your FICO score, no bad marks on your credit history, and they do require that you have been in business for at least 2 years. Therefore, the unsecured business loan works best for established business borrowers with excellent credit history. They are not ideal for start-up funds or if you have a less-than-stellar credit rating.

Now that you know the difference between secured and unsecured business loans, take a moment to decide what loan will meet your needs best, and how much you will need to borrow. It does not hurt to look at your credit report and correct any mistakes you see before applying for a loan, as well. Armed with this knowledge, you can go to your lender prepared to get the best loan for your business.

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Sarah Baker is a documentary filmmaker and writer currently living in New Bern, NC. Her first book, Lucky Stars: Janet Gaynor and Charles Farrell, will be published December 2009. Read more about her.

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