No matter where you are in the world, borrowers have the opportunity to access different types of business loans. There are loans that require collateral, namely secured loans, and there are those that do not require any collateral, namely unsecured loans. Choosing an option will depend largely on the terms and conditions of the lender, as well as your personal preferences and the five C’s of credit of your business.
A secured loan is one where the lender requires some collateral to hold in exchange for the loan. In case of default, the lender will seize the asset so as to get back the amount owed. The amount loaned is usually not the full market value of the collateral. Most lenders will loan out an amount that is between 30% and 80% of the value of the collateral.
Secured loans have both advantages and disadvantages. The following are the advantages of taking a secured loan.
Lower interest rates
Secured loans tend to carry lower interest rates than unsecured loans since the risk of loss on a secured loan is lower for the lender. If you happen to default on a secured loan, the lender will seize the collateral and liquidate it to recover the total loan amount outstanding. Therefore, the risk of suffering a loss is minimized.
Bigger loan amount
With a secured loan, you will be able to borrow a larger amount of funds than what you would have obtained with an unsecured loan. The higher the market value of the collateral, the higher the loan amount that you will be able to access. The repayment period for secured loans is also longer than that of unsecured loans.
Can build a credit rating
Based on a guide to a reliable licensed money lender by Money Kinetics, you can easily build your credit rating positively if you are disciplined in repaying your loan. Having a secured loan gives you a good opportunity to build a good credit score because the interest rate is lower, and the loan terms are more flexible. This will make it easier for you to settle the payments on time, hence resulting in a good credit score.
Taking a secured loan also has some downsides, and these are given below.
Longer processing period
A secured loan will take a longer time to process because of the valuation of the collateral and other documents required. Therefore, if you need the cash urgently, it may not be convenient for you to apply for this type of loan because of the waiting period involved. On the other hand, an unsecured loan is usually approved quickly, sometimes within 24 hours.
Risk of loss
Once you commit your asset as collateral against a secured loan, there is always the risk of you losing it. In case of default, the lender will seize your asset so as to recover the amount that you owe. You could even end up losing the asset after you have paid off a large percentage of the loan. In this case, you will suffer a double loss.
Extra costs
If you apply for a secured loan, the lender will probably charge you extra fees for valuation and processing. This means that you will begin by incurring an extra cost before you even enjoy the benefit of the loan. An unsecured loan does not involve valuation costs since there is no collateral involved.
An unsecured loan is one where you do not need to present the lender with any collateral in order to access the funds. In this case, the lender will approve the loan without demanding any asset as security. The unsecured loan also has its upside and downside. The following are the advantages of taking an unsecured loan.
Quick processing time
Unsecured loans are usually processed very quickly because there is no need for the valuation of assets. You can conveniently apply online for an unsecured loan, and you can receive an approval within a few hours. The disbursement of funds will also be done within a very short time. There are also no valuation fees charged on unsecured loans. Therefore, the initial expenses of unsecured loans are lower than those of secured loans.
No risk of losing an asset
If you apply for an unsecured loan, you will avoid the risk of losing your asset in case of default. With an unsecured loan, the lender will explore other legal avenues to recover the funds if you default on the payments. This is different from a secured loan where you risk losing a valuable asset upon default even though you may have repaid a part of the loan.
Available for a variety of borrowers
An unsecured loan can be accessed by a variety of borrowers. For example, if you have bad credit and you do not have any asset to put up as collateral, then it is possible to access this type of loan. The number of borrowers who are likely to get approval for an unsecured loan is much higher than those who are likely to get access to a secured loan.
Unsecured loans also have a number of disadvantages. These are given below.
High-interest rates
Unsecured loans tend to have very high-interest rates because of the risks involved. The higher the risk for the lender, the higher the interest rate that you will be charged. This will increase the amount that you are required to pay in the monthly installments. You will need to be disciplined in your budgeting so as to avoid defaulting.
Limited loan amounts
The amounts given for unsecured loans are usually limited. Therefore, if you have a project where you need a substantial amount of funds, you may not be able to finance it using an unsecured loan. The loan term for unsecured loans also tends to be shorter than that of secured loans.
More stringent terms
The terms given by lenders for unsecured loans are usually much more stringent than those given for secured loans. If you apply for an unsecured loan, there will be very little room for flexibility when negotiating the terms of repayment. This is unlike secured loans where there is more flexibility, and there is an allowance for negotiation with the lender.
After analyzing the pros and cons of each type of loan, you may choose to apply for a secured loan. Some examples of assets that you can use as collateral once you apply for this type of loan are your car, your house, your parcel of land, and even your stocks.
As a conclusion, regardless of whether you have collateral or not, there are several avenues which you could explore to source for business funds. Some of these are mentioned below.
- You could borrow funds from family and friends.
- You could approach licensed moneylenders to give you a loan.
- You could apply for a government grant by writing a proposal.
- You could also look for a bank with very favorable terms and apply for a loan.
It is important to emphasize you do not need to have collateral in order to get access to a business loan.
