Taking a loan is a big decision while starting a business venture, but it comes with a lot of considerations and other elements, like what type of loan you want for your business, how it will be helpful for you, and whether you will be able to repay the loan amount. You may look for options like a secured loan or an unsecured one for your startup.
The key difference between these two loans is that one requires you to submit collateral as a security for the loan amount you take, and the other doesn’t require any submission, and that depends on your good credit score. Both of these loans are beneficial for the business owners.
However, the amount of loans, their repayment terms, and interest rates vary between secured loan and unsecured loans. This article will help you understand the right loan for your startup and why the right funding is necessary.
What is secured Business Loan
Secured loans for startups offer you financing that needs collateral, which comes in the form of business assets, vehicles, inventory, real estate, account receivables, and equipment.
Business owners can also submit their personal assets to acquire a secured loan. Some common collaterals are:
- Home or car of an entrepreneur
- Financial assets such as stocks and bonds
- Rare jewelry or other valuable possessions
The borrower has to give the lender a legal claim of their assets to get a secured loan. So that if they default on repaying the loan, the lender can sell that collateral and fulfill the loan amount. It decreases the risk of substantial financial loss, which is attached to the lenders.
This is the reason loan interest rates of secured loans are lower, and the repayment terms are longer than those of unsecured loans. Lenders have peace of mind that borrowers who have submitted their assets will be repaying their money to get their collaterals back.
Standards of secured loan
You can apply for a secured loan through different options like credit unions, traditional banks, and online lenders. Following are some of the options for different loan types:
- SBA loans
- Invoice factoring
- Business lines of credit
- Equipment Financing
You should also do deep research on the loan you want to select and the lender to find the best solution for your business.
Deciding factors for you startup
The best loan you can take depends on the needs of your business and how you can match the lenders’ requirements. Listed below are some of the criteria to consider when opting for a secured loan or unsecured loan.
Loan term that suits you
To compare one financing option with the other for your company, you need to understand the finances of your startup. First, calculate the amount you need to borrow and how your business will be able to repay the loan amount borrowed. Then, you need to look for the right lender and get information on the loan amount, the loan interest rates, and repayment terms for secured and unsecured loans.
How much collateral you can provide
If you have enough collateral and you are fine with submitting the same, a secured loan is the right option for you. You can benefit from low interest rates and long repayment terms. In case your credit is not that good, collateral can help you secure a loan. Although, if it’s your new business and doesn’t have many assets for pledging, then you can go for unsecured loans, but you should have a strong credit score and cash flow.
Your loan requirement
When you want to decide on the type of loan you want, you also need to understand that a secured loan will not provide you with immediate funding, as the lenders will have to verify the assets you are willing to put up as an asset. You would also have to gather a lot of documents to get a secured loan. Despite that, if you want the funds immediately for your business, you can go for a short-term loan; in this situation, you can help yourself with unsecured loans.
Conclusion
Selecting the right loan for your startup is a critical decision that requires careful consideration of your business needs, financial stability, and asset availability.
Secured loans offer lower interest rates and longer repayment terms but require collateral, making them ideal if you have assets to pledge. On the other hand, unsecured loans may be suitable for those who need faster funding and have a strong credit score, though they typically come with higher interest rates.
By understanding the differences and evaluating your business requirements, you can choose the loan that aligns best with your startup’s goals and financial capability.