When people think of finance for their business, they believe a commercial loan is what they need. As with all forms of finance, there are pros and cons, and it’s essential that you consider all the options available. Business loans come in two forms; secured loans and unsecured loans, and they are very different.
A secured loan is a more structured way of getting commercial finance, often over a longer term. By increasing the length of the term, you often lower the monthly repayments. Although this sounds more appealing, longer terms increase in the amount of interest paid, due to the amount being outstanding for longer. Another critical consideration is the fact that a secured commercial loan is secured against a tangible asset, such as your home. This gives the lender security in the event of a default, therefore lowering the perceived risk. All lending works on the principle of risk and reward. If the perceived risk is lower, the lender often reduces the amount of interest charged. Secondly secured commercial loans can help businesses to access finance by providing collateral.
Unsecured loans can be a more flexible finance solution and don’t always require homeownership. This is because a personal guarantee backs them. Fintech (Financial Technology) loan providers are growing in this sector, with funds released in as little as 24 hours from the enquiry. The monthly interest repayments are higher than secured business loans. The loan term can be shorter if required, to reduce the overall cost. Unsecured loans are often short-term business finance and are similar to a revolving facility.