The type of loan plays a large role in a lot of the particulars, such as the interest rate, borrowing limit, term, and so on. It is especially important for small business owners and entrepreneurs to understand the key differences between unsecured business loans and secured business loans.
This will enable them to make the best small business funding choices for their organization. Unsecured small business loans are often the funding method of choice for many small businesses.
We’ll explain more about the difference between these two small business funding options below.
Unsecured Business Funding Has NOTHING to Do with Security
First, it’s important to clear up a common misconception about what unsecured business funding or unsecured business loans actually are. Many people who are new to small business finance, or even personal lending and finance, think it has something to do with security.
This is false. There is no functional difference in the security, reliability, or trust involved with an unsecured loan or a secured loan. It has nothing to do with how reliable the lender is, or taking out some kind of insurance policy on the loan.
This is merely a misunderstanding of the term “unsecured business loan” that leads to some confusion among the uninitiated. So, what does unsecured or secured mean in the context of a loan?
It’s All About Collateral
In fact, secured and unsecured are terms used to describe the collateral situation on a loan. An unsecured small business loan, or any kind of unsecured loan, means a loan that requires no collateral as a condition of lending.
It is less frequently called a no collateral business loan, which gets more to the point and can be a bit less confusing to newcomers.
A secured loan, on the other hand, requires assets be put up as collateral in order to issue the loan. For businesses, this typically includes property, plant, and equipment, or personal assets of the owner(s) such as a home, car(s), and so on.
Both types of small business loans are available, though many small business owners prefer unsecured business funding to minimize their financial risk.
Secured Small Business Loans
As explained above, a secured business loan, or any kind of secured loan, is one that requires collateral. The lender requires the collateral be put up as a guarantee of your repayment.
That way, if something goes wrong, and you are unable to generate sufficient funds from business operations to repay the debt, the lenders know they can collect the balance by selling your collateral assets.
The benefits of a secured loan as a form of small business funding are that you typically can get lower (better) interest rates on the loan, and may be able to have a higher borrowing limit.
The lender has more assurance of repayment, and it represents less risk for the lender. Consequently, you pay less for the convenience, in the form of a lower interest rate. The downside, however, is significant for small business owners.
If you default on the secured small business loan, you forfeit your collateral. And since it’s usually valued at a lower rate by the lender than it would be on the open market, you can end up getting less value for your assets in the event of a loan default.
Many small business owners are not willing to risk losing offices, equipment, or their own homes and vehicles in order to generate small business funding. And so, they turn to unsecured small business loans instead.
Unsecured Small Business Loans
Unsecured small business loans, or unsecured business funding, provides the ideal small business funding option for many small business owners.
With no collateral requirements, business owners don’t need to risk their offices, equipment, homes, cars, or other assets. Unsecured business lending companies look at other factors to determine their risk in lending you the money, and your ability to repay the loan.
These factors can include:
- Business receipts, sales, and revenue over a certain period of time
- Credit rating and report
- Industry reputation
- Business plan
- Letters of credit from other lenders or financial institutions
- Other business data, such as how long you’ve been in business, growth over time, etc.
The main downside of unsecured business loans is that because there is a higher level of risk for the lender, the interest rates are usually somewhat higher than those available with a secured loan.
However, as a no collateral business loan, business owners don’t need to risk their assets, or risk those assets being undervalued in the event of a loan default.
This helps provide business owners with a better risk-reward equation for their businesses, and usually justifies the marginally higher interest rates on the small business loan.
Unsecured Business Funding from BizFly Funding
BizFly Funding is one of the pre-eminent unsecured business lenders in the US today. With extensive experience and expertise, we have a history of providing unsecured business funding to small businesses all around the country, in many different market sectors.
If you are in need of unsecured small business loans or other small business funding, BizFly Funding should be your first choice.
You can apply and get approved for unsecured business loans with just a few clicks and some basic information, without any impact on your credit score. Funds are available typically within 24 hours following loan approval.
We maintain relatively few minimum requirements to qualify, so that we can look at each and every business as the unique entity it is, and make an approval decision based on your financials rather than your size.
Several different types of unsecured small business loans are available, along with favorable interest rates, variable loan terms, and a large range of loan sizes. So if you’re a small business owner looking for small business funding, consider BizFly Funding.
Get the funds you need to help your business soar!
