Is A Small Business Loan Secured Or Unsecured?
As a small business owner, it is up to you to choose the type of business loan that is perfect for your needs. Your choice of a loan will be influenced by factors such as your credit ranking, total assets, etc.
Unsecured business loan
An unsecured small business loan is a type of loan that does not require security or collateral. However, the lender still has a general claim on your assets should the borrower default. This type of loan is based majorly on the lender accepting the creditworthiness of the small business owner. The most common type of unsecured business loan is the business credit card or line of credit.
Due to the risks involved, most banks mostly prefer a secured loan over an unsecured business loan as the value of a secured loan is based on the value of the borrower’s assets.
Secured business loan
Generally preferred by lenders, secured loans are more flexible and attract better interest rates compared to unsecured loans due to the lower risk level. A secured business loan uses assets as collateral, providing a level of security for the lender to recover their losses should the borrower default. Assets that can be used in a secured loan include vehicles, real estate property, equipment, machinery, land, or other valuable assets. In case the borrower defaults, the lender may claim the secured asset.
Assets used to secure loans help lenders calculate the loan-to-value ratio. Secured loans often offer better terms to the borrower due to their lower amount of risk. The asset valuation process can prolong the application duration of a secured loan, making it take longer than an unsecured loan.