Unsecured vs Secured Loans: How These Funding Types Differ
Starting a new business typically requires at least some upfront monetary investment. There are two specific types types of loans for small businesses: unsecured vs secured loans. Both are viable options to consider when funding your business. However, unsecured and secured loans each have their own unique characteristics. So, what’s the difference between these loan types and which one should you choose?
According to a study conducted by the Kauffmann Foundation, the average startup cost for small businesses in the United States is approximately $30,000. Of course, some businesses require even more money, while others require slightly less. While entrepreneurs can always fund their ventures with their own personal money, another option is to seek a loan.
Unsecured vs Secured Loans: What’s the Difference?
An unsecured loan is a financing option in which no collateral is required. As a result, they are often more difficult to acquire than a secured a loan. You’ll need to prove that your business is financially stable and able to pay back the loan; otherwise, the lender may reject your application for an unsecured loan.
If you are unable to repay an unsecured loan, the lender cannot repossess or otherwise take your property, because there’s no collateral.
Secured loans differ from unsecured loans in the sense that they require collateral. When applying for a secured loan, you’ll need to specify the assets you wish to place as collateral. Assuming you pay back the loan according to the agreed terms and conditions, you’ll still retain ownership of the collateral. If you fail to pay it back, however, the lender can legally repossess these assets.
There are several benefits associated with secured loans, however. While they require collateral, they typically carry a lower interest rate when compared to their unsecured counterpart. For business owners and entrepreneurs seeking large loans, the lower interest rates of secured loans can save big bucks over the course of a year.
Additionally, secured loans typically have a higher borrowing limits. Of course, this shouldn’t come as a surprise given that it requires collateral. Lenders are more willing to offer high borrowing limits with unsecured loans since there’s collateral backing the loan. Because of these reasons, it’s usually best to choose a secured loan over an unsecured loan.