Understand the pros, cons and best uses of each financing option to choose the right loan for your business.

Establishing, expanding and managing a business often requires financing. Loans are one of the most common ways to funds these needs. Some are secured, while others are unsecured. Here are the key differences, and when a business might use each.

Collateral is a key difference

A key difference between secured and unsecured loans is collateral. With a secured loan, one or more of the borrower’s assets serve as collateral. If a secured loan isn’t repaid, the asset may be turned over to the lender to satisfy the debt. The most common secured business loans are for commercial real estate, business assets such as equipment and vehicles, accounts receivable and inventory.

Unsecured loans aren’t backed by collateral. If the unsecured loan isn’t repaid by the business, the guarantor is personally responsible for repayment. Business lines of credit and business credit cards are common types of unsecured loans.

Unsecured loans are often used when a business doesn’t have assets to use as collateral or prefers not to pledge its assets to secure a loan. Because there is no collateral backing the loan, these financing options generally present a higher level of risk for lenders. As a result, businesses may face more stringent approval requirements, such as stronger credit profiles, proven cash flow or a longer operating history. When evaluating unsecured loan applications, lenders typically consider factors such as how long the business has been in operation, past payment history and the business’s ability to repay the loan.

How rates and terms differ between secured and unsecured loans

Secured loans pose less risk for lenders. As a result, they typically have lower interest rates than unsecured loans. Also, larger loan amounts and longer repayment periods are available with secured loans.

Determining which type of loan your business should use

How you plan to use the funds can help determine which type of loan is right for your business. Secured loans are generally used for the purpose stated in the loan application. Unsecured loans are more flexible and can be used for almost any business purpose.

Advantages of working with a local lender

As a local business serving other local businesses, the Consumers business services team has first-hand knowledge of the communities we serve. For business members, this means faster service, local decision-making by people who get to know you and your business. Call us at 800.991.2221 or contact one of our commercial loan officers online to get answers to your business loan questions.

 

All loans subject to approval. Rates, terms, and conditions are subject to change may vary based on credit worthiness, qualifications, and collateral conditions.