What types of small businesses are best suited for secured or unsecured loans? Learn more about loan types and the role of non-bank lenders such as Mortgage Masters.
Why Get a Small Business Loan
Small business loans offer an injection of funding to unlock your potential and drive an explosive new level of business growth. Often, they make the difference in being able to establish a firm foothold in an increasingly competitive market.
So while it makes business sense for most small businesses to get a loan, the first big loan decision to make is between secured and unsecured loans.
What Are Secured Loans?
For a secured business loan, the small business needs to put down business assets as collateral for the loan. These assets could be equipment such as machinery and vehicles, or the commercial real estate of the business premises. If the small business is unable to meet the terms of the loan repayments, to the point of loan default, the lender has the right to recoup the assets. They can sell the assets and use those funds towards the loan repayments, to bring down the final amount owed.
From the lender’s point of view, lending money to a small business can be risky, but some of this risk can be mitigated by securing the loan. From the small business’s point of view, while a secured loan puts your business assets at risk, the assets are safe as long as you keep up with the loan repayments. An alternative way to look at it is that, if your business is unable to get a loan unless it’s secured, it’s putting your business more at risk to not receive the stability provided by a loan investment.
The Difference in Interest Rates
It should stand to reason that secured loans can be negotiated for lower interest rates than unsecured loans. With unsecured loans, lenders are taking more of a risk in investing, so they need to justify their riskier investment choices with the higher interest payments they will provide.
As well as lower interest rates, secured loans are usually for larger amounts, have fewer restrictions on how the loan money can be used, and have a longer timeframe for when the loan has to be repaid by. All in all, a secured loan is more flexible and cheaper in the long term than an unsecured loan.
Bank And Non-Bank Lenders
If an unsecured loan is the right choice for your business, you may find that a non-bank lender is the best small business lender. Bank and non-bank lenders differ in their approach, and non-bank lenders are more receptive to unorthodox financing options such as unsecured loans. With a number of non-bank lenders entering the market in recent years, you will be able to find competitive options for unsecured loans. Read more about this on our Unsecured Loans page.
Talk to a Loan Broker
To book a consultation or ask any questions you may have about your finances, give us a call on 0800 630 7171.