What are Unsecured and Secured Business Loans?
Business loans may be in the form of either secured or unsecured.
A secured loan is a loan in where the borrower pledges an asset (e.g. property, equipment, stock, etc.), known as a collateral, for the loan, which then becomes a secured debt owed to the lender / creditor who gives the loan. The debt is therefore secured against the collateral, and if the borrower defaults on repayment and the debt is not repaid, the lender / creditor can claim possession of the asset used as collateral, and may sell it to regain some or all of the amount originally loaned to the borrower. Examples of secured business loan are mortgage loan (commercial / industrial property loan), invoice financing, and equipment loan.
An unsecured loan, on the other hand, is not connected to any specific asset. Instead, the lender / creditor may give out the loan only against the borrower (company or business). Although it does not have collateral, the lender will still have a general claim on the borrower’s assets if repayments fail. Examples of unsecured business loan are microloan and business term loan.
Related: What is a business loan?
In the event that the borrower becomes bankrupt, lenders / creditors of the unsecured loan will usually realise a smaller proportion of their claims as compared to secured lenders or creditors.
As a result, secured loans generally have a lower rate of interest than unsecured loans because of the added security for the lender. However, other factors such as credit risk (e.g. credit history and repayment ability) and expected returns for the lender also affect the interest rates.
To understand more about how a secured or an unsecured loan can help you grow your business, contact us today.