There are many ways to get financing for your business. Corporate loans should be used to drive your business forward and, for example, be used for a variety of purposes such as equipment, inventory and unexpected expenses. There are different types of corporate loans when it comes to the type of collateral the lenders need. Here we will take a closer look at the differences between unsecured and secured corporate loans.
Corporate loans with collateral
A secured loan is one of the most popular types of corporate financing. Basically, it gives the lender a security if your company would find it difficult to make a full repayment within the loan term. For example, the security may be: machines or individual property. Because the risk is lower for lenders, it allows them to lower interest rates and fees. It gives you an opportunity to be awarded higher amounts and make a greater investment in your business. However, the loan’s interest rate, period and maturity will depend on the owners’ personal credit risk, hence, how high the collateral the owners provide. The main condition for obtaining a secured corporate loan is to have something that can be used as collateral. This means that the owner already has an asset. A classic loan that is not commercially secure is, for example,
Benefits of a secured corporate loan
- Lower risk for lenders that usually results in higher loan amounts,
- Lower risk also includes a fixed monthly interest rate and a longer repayment period,
- If a company has a problematic loan history, it can be a good way to get a loan as the lenders regard the assets as collateral.
Disadvantages of a secured business loan
- If your business is relatively new and without assets, a loan with certainly can be difficult to get,
- If you are unable to repay, you risk losing access to the lender
Business loans without collateral
For an unsecured corporate loan, the lender usually does not have the same level of collateral to get the money back, which means that the risk to them is much higher.
Unsecured lenders usually reduce this risk by lending smaller amounts on shorter periods and higher interest rates. The lender instead bases the loan amount on the company’s turnover and calculates the company’s future success based on its past earnings. This type of corporate loan can be very lucrative for seasonal companies, for example in the tourism industry where revenues are very high for a certain period.
Benefits of an unsecured corporate loan
- Having unsecured assets means the company can sell them as they please without the lender’s permission
- For unsecured loans, the initial costs are usually lower due to the lack of legal costs such as valuation.
- An unsecured loan is a good alternative for a relatively new company that has no assets to offer as collateral and needs more flexibility in the repayment period.
Disadvantages of an unsecured corporate loan
- Unsecured corporate loans pose a higher risk to the lender. They usually offset the risk with a higher interest rate,
- Many lenders will offer a lower loan amount for a company that cannot offer assets as collateral.
- If your company’s negotiating power is low, it may be more difficult to obtain financing in the form of a secured loan.