If you've applied for a business loan recently, you may think the idea of getting a collateral-free loan is absurd. Most banks only offer secured funding for new businesses, but that doesn't mean you can't find unsecured options out there. Should you try for unsecured lending or should you stick with the secured alternative? Here's an analysis to help you come to an educated decision.
Risk. There is a greater risk for the bank in offering an unsecured loan, but there is less of a risk for you. Rather than having to worry about losing your home, your car, company machinery, or another asset, you just have to worry about paying the loan back. This may make it a little harder for you to get funding, but it will ease your stress in the long run. Common unsecured loans include alternative business loans, credit cards, student loans, and personal loans.
Secured loans are backed by collateral, which can be a personal or business asset. This poses less of a risk for the lender and more of a risk for the borrower. If you fail to make payments per the agreement, your asset(s) could be taken by the lender. Furthermore, collateral typically requires a certified appraisal, costing you more time and money. Secured loans may be a good option if you have no credit or poor credit. Common types of secured loans include traditional business loans and all SBA loans.
Timing. To get a secured loan, you have to wait for a lender to evaluate your assets and determine how much they are worth. For an unsecured loan, all you have to do is prove that you can make the payments as agreed upon. This will get you money a lot faster in the long run, as long as the bank doesn't take its precious time with the approval process. When time is of the essence, you’re better off applying for an unsecured loan through an online lender.
Payments & Fees. Payment options for unsecured loans tend to be a little more flexible for the borrower, but also more expensive due to the risk. Secured lenders are quick to jump into repossession if you miss one or two payments, while unsecured lenders are a little more lenient. Most unsecured loans have a fixed interest rate and unsecured loans have variable interest rates.
The fees associated with unsecured loans are typically lower than those of secured loans because you don't have to pay a pre-funding fee or qualification fee. You just need to submit an application and wait for a loan decision. This will vary by lender, but for the most part, you'll save money up-front by getting an unsecured loan. Additionally, interest associated with a secured loan can be used as a write-off when filing your taxes.
Value. If you work with a secured loan, you will be limited to the amount of money you can get. Even though banks are more willing to lend in this situation, they are only willing to lend a certain percentage of the collateral's worth. This will ensure that they can recoup their money if you default on your loan.
Availability. Not everyone can qualify for an unsecured loan, especially those issued by traditional banking institutions. Most banks will require excellent credit, at least 2 years in business, one year of bank statements, a solid business plan, and even an established relationship with the lender. There can also be situations in which secured loans are unavailable, like last July when the SBA temporarily shut down because they hit their loan cap. So even you aren't limited by your qualifications, you could still be limited by available SBA loans.
Consider your options carefully, and choose the option that truly represents the future of your business.