In an ideal world, a business would be able to pay for all its operating costs, fund any expansion and deal with any unexpected bills from a cash “pot.” However, this is very rarely the case, and business owners will, from time to time, be faced with a challenge that requires them to look for alternative funding methods.

In this case, they will often look for a loan but will need to consider what type and take into account all of the pros and cons. Before they can proceed, they may need to find out the difference between secured and unsecured loans and how one may be more appropriate than the other. What do they need to think about?

Secured vs Unsecured Loan – Secured

When comparing a secured loan vs unsecured loan, many people would be familiar with the former, which they may come across when they first purchase their home. In this case, they would take out a mortgage, and the money would be issued to them, so long as the lender could secure the risk against the property itself.

The same kind of arrangement can apply in a business situation when applying for a secured loan, so long as the organisation has something to give in return as security. This can take many different forms as it could be a personal asset or something tangible that is already owned by the business in question.

Typically, the terms of such a loan will depend on the type of business and often, the personal circumstances of the business owner. The lender may be willing to be more flexible because the risk is perceived to be lower and this may affect the amount that can be borrowed, the interest rate that will be levied or the term of the arrangement.

Lenders are more willing to look at this type of loan because the risk profile is a lot lower. They will be able to get a certain amount of priority in the unfortunate event of a business failure and will, therefore, be able to exercise greater control over the amount outstanding. On the other hand, the business owner will be able to take advantage of lower interest rates or a longer repayment term, which could help them with their planning. However, they will need to take into account the ultimate risk, as this could mean the loss of the asset if they were not able to make the payments and legal action were taken.

Secured vs Unsecured Loan – Unsecured

On the other hand, an unsecured business loan has less risk for the borrower but may present more of a challenge for the lender. There is no security, and this will certainly affect how much can be borrowed and the length of the repayment term.

In this case, the lender will look much more closely at the business and will be very interested in its turnover and track record. They will estimate business performance based on past history but will typically levy higher interest rates. This type of loan may be fine if it is to be used to plug a shorter-term cash flow deficit, for example, but may not be applicable for a longer-term borrowing requirement.

To qualify, the borrower will need to have a good track record and put forward a convincing case, as the lender will need to carry more risk throughout the agreement.

What’s best, when looking at secured versus unsecured loan options? Much will depend on the requirement, the ability to repay and the presence of a securable asset. Get in touch with Cigno Business to discuss your requirements.