Small Business Loans

Whether you are an entrepreneur seeking to start a new venture or a business owner looking to expand existing operations, chances are you will at some point require a business loan. In the world of business financing there are basically two kinds of loans available: secured and unsecured.

What is a Secured Loan?

With a secured loan, the borrower backs up the loan application with some form of collateral. The collateral can consist of just about any kind of asset, from “hard” assets, such as real estate, equipment, or income, to “soft” assets, such as software or patents. By offering collateral, the lender is assured that if payments are not met, there will be something to seize and sell in order to recover losses.

Because the collateral reduces the default risk inherent to most loans, lenders are encouraged to make these loans more appealing to a prospective borrower. Secure loans tend to have better interest rates, longer repayment periods, and they can be taken out for greater amounts of money.

Moreover, when a loan is backed up by collateral, lenders are less concerned about the borrower’s credit history. This is welcome news to owners and businesses that are suffering from bad credit.

What is an Unsecured Loan?

As the name implies, an unsecured loan is one in which no collateral is offered to back up the loan. Lenders will consider your credit rating and financial history when deciding whether or not to approve your application.

Since unsecured loans are inherently more risky for the lender, they tend to have higher interest rates, short repayment periods, and are given out in smaller amounts.

How Do You Choose?

The type of loan that is best for you and your company really depends on your unique circumstances.

If either you or your company has any assets to offer as collateral, then it may be a good idea to apply for a secured loan so you can capitalize on the more favorable terms and conditions. For new and developing businesses, a secured loan may be the only traditional financing option available since these companies often deal with issues that may prevent them from receiving unsecured financing, such as poor or limited sales history, negative cash flow, and bad credit. But even here, either the owner or the business itself must have something of value to secure the loan.

Unsecured financing is for businesses that lack assets to offer as collateral. In most cases, these businesses must already be in operation and must display the ability to repay the amount funded.

Some of this information has been provided by First American