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5.19.2022

Unsecured vs. Secured Loans: What's the Difference?

Introduction

Secured and unsecured business loans are two of the most common types of business loans that you can get to manage your short term business debt obligations and maximize capital expenditures. While both options may allow you to secure funding in order to help with equipment financing or expansion, they have different terms and requirements. The closure of Paycheck Protection Program (PPP), an unsecured loan designed to provide a direct incentive for business owners to keep their workers on the payroll, has also forced numerous banks and traditional financial institutions to revisit their relationships with borrowers in attempt to offer financial products that meet the needs of small businesses that survived the financial realities of a global pandemic. PPP loans offered low-interest small business loans that were federally guaranteed and became very prevalent during the peak of the COVID-19 crisis because borrowers faced the possibility of having their loans forgiven if business owners maintained their payrolls and used the funds for approved operating expenses, such as rent and utilities, during the pandemic.

In general, secured loans offer lower interest rates while unsecured business loans offer more flexibility. Both have their benefits and drawbacks so which option should you take? Read on for a closer look at both secured and unsecured business loans so that you can figure out which one will work best for your needs to grow your small business.

What is an unsecured business loan?

An unsecured business loan is a type of loan that does not require any collateral to secure the working capital. Unlike secured loans, which are backed by some form of collateral, such as a home, vehicle or other form of personal guarantee, unsecured business loans tend to have higher interest rates and are generally considered riskier for lenders. Unsecured business loans are typically offered by any number of banks and other financial institutions and may be a good option for small business owners who don't have a sufficient credit history or a line of credit. Despite these potential drawbacks, unsecured business loans can be a great option for SMB entrepreneurs who need access to quick cash and don't have any collateral to put up as security.

Advantages of an unsecured business loan:

  • easier to apply
  • funds are made available within 24 hours on many occasions
  • more flexible monthly payments
  • less restrictive on how you can use the working capital

What is a secured business loan?

In this case, your loan must be backed by collateral. This means that if you default on the loan, the lender has legal rights to seize your assets in order to recoup their losses. Because secured business loans involve less risk for lenders, they often come with lower interest rates than unsecured loans. Additionally, secured loans may be easier to obtain for individuals with bad credit, as the collateral can act as a "safety net" for the lender.

Advantages of a secured business loan:

  • more competitive interest rates
  • great for people with a bad personal credit score  or low personal creditworthiness
  • longer payment terms

Which type of business loan is right for my small business?

The type of loan that is right for you will depend on your individual circumstances. If you have bad credit, a secured loan may be a better option for you, as it will be easier to obtain and may come with a lower interest rate. However, if you need quick access to small business funding and do not have any assets that can be used as collateral, an unsecured loan may be your best option. Ultimately, it is important to weigh the pros and cons of each type of business loan, and carefully consider your financial situation and goals before deciding which loan is right for you.

So if you are considering taking out a small business loan, it is important to do your research and carefully consider all your options before making a final decision.

A quick & easy solution.

If you're a small business owner who needs up to $500,000 in working capital, and prefer to not worry about putting up collateral then Fundomate's small business funding program may be a viable solution for you. The process is not only quick and easy but offers attractive advantages:

  • apply with no impact on your credit score
  • get funded within 24 hours
  • no personal guarantee or personal assets needed
  • get a qualified offer in minutes
  • flexible repayment options
  • no restrictions on utilization of funds
  • generous eligibility requirements including a minimum of $10,000 monthly gross revenue, 12 months or more of business history and a credit score of 600 and above

Fundomate is a leader in embedded finance, automated business funding solutions and real-time banking tools. Since 2016, Fundomate has funded over $250 million to more than 3,000 small businesses in an effort to solve their cash flow needs. Visit fundomate.com to learn more or apply now to start growing your business today.

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