What’s the difference between secured and unsecured loans?

As a small business owner, it’s important to understand the distinction between “secured” and “unsecured” when searching for financing.

Secured business loans
A secured business loans means that you need to offer collateral alongside your repayment.

By offering collateral, business owners afford lenders a way of knowing that they can collect on the balance of the loan if anything goes wrong.

There are many different forms of collateral – ranging from inventory or equipment to your own home. Sometimes, secured loans can come at lower rates.

However, the downside is that if you default on the loan, you lose the collateral itself – and lenders often give lower value to collateral than a borrower or appraiser would, meaning that whatever you put up will be exchanged at a lower cost than it is worth.

Unsecured business loans
An unsecured business loan is when the borrower doesn’t need to offer collateral or a comparable form of security to the lender. These loans take other factors into consideration when determining risk, such as the health of your business, credit ratings, reputation and other data. Sometimes, unsecured loans can come at higher rates than secured loans.

Next time you are looking for financing, be sure to ask your potential lenders whether they offer secured or unsecured loans. It’s an important part of your dialogue with your lender, and determining which financing choice is right for your business.