What is the difference between secured and unsecured business loans?

When comparing business loans, it can sometimes be difficult to determine which type of loan is best for your business’ financial needs. There are a multitude of factors to consider when choosing small business loans: how much can you afford to borrow? Would you prefer smaller repayments over a longer period of time or do you want to pay off your loan as quickly as possible?

One of the most important decisions to make about your loan is whether it is secured or unsecured. Here we break down the difference between the two types of business loans to help you figure out which one is best for you.

So, what’s the difference between secured and unsecured loans?

Secured and unsecured loans refer to the type of security a lender requires when a business owner takes out a loan. This means that if there’s a risk that a business will default on its loan repayments, the lender wants reassurance that they’ll get back the money they loaned to the business.

As its name suggests, a secured loan requires a form of security. This is often in the form of physical assets. For example, if an individual takes out a secured loan for a car, the car is used as collateral if the borrower defaults on their payments; this ensures that the lender does not simply lose the money they loaned. The security covers the outstanding balance or interest on the loan.

An unsecured loan, however, doesn’t require physical security. Instead, applications for an unsecured loan are assessed based on the financial health of your business and your credit score.

What are secured loans?

Secured loans are typically easier for a business to obtain, though the approval process is often much longer than that of an unsecured loan. It’s also likely that a secured loan has lower interest rates; this is because the borrower is providing security for the lender, so the lender isn’t concerned about losing their money if the borrower cannot make their repayments.

What are unsecured loans?

Instead of using physical assets to secure the loan, unsecured loans use the financial strength of your business as security against your loan. Most unsecured loans are quite small, usually sitting around $100k or less. Although they tend to have higher interest rates than secured loans do, the approvals process is much faster, giving your business the money it needs, sooner.

How do you know which type of loan is best for your business?

You know your business better than anyone, so it’s important to consider your business goals before you weigh up both loan options to decide which is best. If you need access to funds as soon as possible to grow your business rapidly, an unsecured loan may be best because of its quicker approval time. On the other hand, if you are after a larger sum of money for your business, or lower interest rates are important to you, it is probably best to opt for a secured loan.

How can Zip Business help?

Zip Business is known for offering an interest free ‘buy now, pay later’ service – but did you know that we also offer buy now pay later designed for business? To get started on your application or to find out more about what we can do for your business, get in contact with us today.