Short term business loans could be secured or unsecured it’s your choice?
A typical decision a business has to decide when requesting finance is whether to choose an unsecured or secured loan.
In plain terms, the secured business loans are taken out against a borrower’s security, with the lender holding a legal charge or debenture on a specific property asset.
Should the loan not be repaid, the lender can then legally seize the asset in lieu of payment.
In comparison, an unsecured business loans does not involve a recognised charge over any property the borrower owns.
So which style of business loan is likely to work best for your business? It’s fair to say that both have their advantages and drawbacks. So what are the benefits and disadvantages of the Unsecured Business Loans.?
The main benefit of an unsecured style of lending is that if your business struggles to keep up with repayments it is much harder for the lender to take control of your assets.
In the first instance, the lender would normally report the default to all the credit reporting agencies, whilst remaining in contact to negotiate a possible repayment management plan.
However, if the lender suspects the loan was taken out fraudulently, then a more strong approach can be taken to recoup their funds.
The main disadvantage, hardly startlingly, is that lenders set a more difficult criteria for unsecured loans.
Since the loan is effectively riskier, lenders will commonly wish to see a strong and stable trading history on the business before making an agreement to fund the borrower.
Their decision will also be based on the reason for borrowing the money and whether it will put the business in any financial stress if the loan was approved.
In majority of cases, the lender will only agree to fund the business if the directors offer a personal guarantee.
This means that if the business is in default, the lender can pursue the directors as individuals, placing their personal assets at risk. In this way, unsecured borrowing can actually be riskier than secured loans.
So what are the benefits and disadvantages of the Secured Business Loans.?
The biggest drawback of a secured loan is reasonably obvious: if you cannot keep up repayments, you can lose the property you used as security for the money.
However, there are also several key advantages to this type of borrowing.
First, the lenders interest rate is expected to be lower due to the reduced risk.
With an unsecured loan, the lender will factor the cost of defaults into the interest rate.
Agreeing to take a secured loan and you can make substantial savings over the life of the arrangement.
This takes us onto the second advantage which is the actual finance term offered. Agreeing to a secured loan and you can generally discuss a longer repayment period – sometimes several years longer.
Since there will be property security to back the loan, the lender will be less concerned about a longer repayment term, giving you a higher level of flexibility and lower monthly loan fees.
In fact, factoring in the benefits of both a longer term and a lower interest rate, monthly repayments can be vastly lower with a secured loan.
Finally, you will be able to borrow a lot more business funds if you choose the secured option as long as your security being offered has enough equity in its value.
Unsecured business loans are based purely on your business standing and possibly your credit rating score, and lenders are more thoughtful to the risk of default.
With a secured loan, you can borrow a substantial proportion of the value of your property, as lenders are positive that they can get their money returned even if you happen to fall into financial difficulties and default on the loan.
Whilst secured and unsecured business loans both have their benefits and setbacks, secured business loan is often the better selection for longer and larger required loans.
You will be able to borrow more, over a longer period, at a more competitive interest rate, and lenders will place less prominence on your business trading history and its cash flow, making you more likely to be accepted.
Equally importantly, you are much less likely to be asked to provide a personal guarantee if you choose the secured business loan option.
Finally, each and every business has its own financial requirements, hence an unsecured business loan can definitely be a useful finance option, but in most cases a secured loan will offer more flexibility and significantly better value for money if you are lucky enough to have security to offer for your business loan.