Maintaining steady cash flow is a difficult job, especially for businesses who are still relatively small. Sooner or later, businesses inevitably find themselves short on funds. To deal with this, business owners often turn to loans. Choosing the right kind of loan, however, is a crucial issue that might get less experienced business owners into trouble. Not all loans are created equal, because they’re not all meant for the same kind of cash flow problem. Moreover, businesses can’t always qualify for a loan, which can make things difficult right when the stakes are highest.

shutterstock 563138557 300x204 - Choosing the right kind of loan: secured vs. unsecured

Business owners need to understand what kinds of loans are best for them, and whether it’s time to look to other financing options. Additionally, it’s important to know the difference between secured and unsecured loans, and how lenders manage the risks of each. With this knowledge, they can make better borrowing decisions, and provide more financial security for their business.

Secured loans

To get a secured loan, the borrower has to offer security, which is an asset, or a number of assets, that are used to guarantee repayment. For a business, this will typically be land or equipment. If the borrower is unable to repay the loan, the lender will take those assets in place of monetary repayment in order to recover their investment.

Pros and cons

A secured loan is a very safe bet for a lender to make. After all, there is effectively no way for them to lose their money. This allows them to offer relatively low interest rates, and to set long terms for repayment. What that means for business owners is that, if they need to take out a very large loan, they’ll very likely be able to do so more cheaply, and to repay it back more slowly if it’s secured.

The process of setting up a secured loan, however, is complex. Lenders need to appraise the value of a business’ assets, and examine their business credit profile before they can make a decision. If that decision is a denial, it can impact the business’ credit profile going forward. Worst of all, it can take weeks or months to process a loan application. A business dealing with an urgent cash flow issue might need access to funds within hours or days to keep operations running smoothly.

Unsecured loans

As the name suggests, unsecured business loans are not secured by any specific assets. Instead, the lender may run a credit check, demand a personal guarantee —in which an individual makes themselves personally liable for repayment, or simply offer the loan on faith that it will be repaid. For lenders, this is obviously more risky. To manage this, unsecured loans typically come with higher interest rates, and shorter terms.

Pros and cons

When a piece of equipment breaks down, a growth opportunity comes along unexpectedly, or a client doesn’t pay on time, businesses need cash as quickly as possible. Unsecured business loans allow businesses to get access to funds very quickly, sometimes in less than a day. They’re ideal for managing unexpected costs, and filling in temporary gaps in funding resulting from a long cash conversion cycle.

These types of loans, however, usually need to be repaid in a matter of months, rather than years. Since startups often take years to become profitable, it’s important not to rely on them for long-term startup capital. Moreover, because they’re generally short term, businesses should know at the start exactly where the funds for repayment will come from. Borrowing in the vague hope that sufficient revenues will materialise to service the debt is unlikely to work out within a restricted time frame.

Loans aren’t always sufficient

Loans, both secured and unsecured, are great financing solutions when used appropriately. Unfortunately, loans aren’t always an option. Businesses that have already borrowed a great deal, or who don’t qualify for a loan for any number of other reasons, need additional cash flow solutions.

Alternative finance institutions like Fifo Capital specialise in providing both unsecured loans, and other short-term financing to businesses to ensure that they have the funds they need when they need them. That often means using invoice financing, supply chain finance, or a combination of one or both of these with an unsecured business loan to generate the cash flow your business needs to operate smoothly and to grow. Our financial representatives work with business owners long-term to get to know their needs, and to ensure that they get the ideal financing solution for their particular situation.

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