Seeking unsecured business funding can be a great idea but depending on your current status, it might not be the best one for your business, specifically. Your best bet on not ending up in a bad position is knowing how unsecured business loans differ from secured ones and what the advantages and disadvantages of getting one are.
The unsecured business loan
An unsecured business loan is just that, a loan that is not secured by any type of collateral. While you are still obligated to pay what you owe on time, failing to do so won’t lead to the lender taking away your car or house (collateral). The term “unsecured” refers to the lender, rather than the borrower, because they are the ones that lack security in this deal.
- With an unsecured loan, you are free to take a loan without having to worry about collateral, as mentioned. Knowing that you are not running the risk of losing your house where you and your family live can be a huge weight off your chest.
- The lender needs some type of guarantee that they can make a profit off of this deal, so thus the interest rates are much bigger for unsecured loans.
The secured loan
This type of loan is pretty much the opposite of an unsecured loan. You have to put down collateral in order to get it, but it does come with some advantages as well.
- You get lower interest rates
- You can get loans that your credit score might not have qualified for otherwise
- You can lose your house, car, business assets or anything you put down as collateral
As you can see, there are some clear differences between the two, and most times you will probably benefit more from the unsecured business loan simply because there’s no risk of losing collateral. However that doesn’t mean that you can’t be touched if you don’t repay your debt. In unsecured loan situations, lenders have the freedom of pursuing any asset you own in their mission to recover their investment. But of course, there’s a difference between pursuing and actually getting, so don’t translate that to “unsecured loans mean the bank can take whatever they want later”.
Before you make a decision regarding what type of loan you will pursue, it’s always best to take a moment and evaluate all of your options. Maybe you can do more work with a line of credit instead, or maybe a merchant cash advance will do the trick even better. Explore all your options before deciding, so that you don’t regret your decision later down the road.