If you’re looking for a fast business loan to get you through a short-term crunch while you’re waiting for a predictable demand surge or a big account payment from a regular client, you need to know your options and the advantages each brings to the table. Being careful about your lender means you can find a good deal for practically any financing structure, but each has its own best use cases, so it’s possible to work with a great lender and still wind up overpaying just because you accidentally selected a financial product that isn’t cost-efficient for your current circumstances. When you’ve already decided a traditionally structured term loan is your best option, that still leaves a choice between secured loans like hard money bridge loans and unsecured business loans.
Advantages of Secured Loan Structures
The maximum size and cost of loans to your business are both determined by the perceived risk to the lender, and one way of mitigating that risk is through collateral. This gives the lender recourse to recover at least part of the loan’s value quickly in the event of a default. As a result, lenders tend to approve larger loans when collateral is involved and they tend to offer much better rates. Sometimes, they even offer longer loan terms because the extra security lowers their risk so substantially. That being said, there are risks and limitations to secured loans that you don’t have with unsecured business loans.
While it’s often possible to get loans that are larger than you would with unsecured options, your loan size is often limited by the value of the collateral you can put up. Often, that upper limit is somewhere between 60 and 75% of the item’s sale value in the market. As a result, assets that depreciate like machinery and vehicles yield less as collateral over time. That being said, if the equity is there in an asset your company owns, it’s a very cost-effective way to get working capital quickly.
Advantages of Unsecured Loans
Unsecured loans are a little riskier to the lender, but if your credit score indicates you have a strong repayment history and your company’s income is high enough to support the repayment with your current debt load, they are a good way to get a fast loan approval. Unsecured loans do have higher interest rates than secured loans, but the rates still tend to be reasonable and the approval times are often quite a bit faster. The limitation here is usually access. For a cost-effective unsecured loan, you really need good business credit and a consistent history of profitability for a couple years. Anything less than that and you will be paying a little extra to mitigate the risk, but you’ll still find unsecured business loans quite accessible for smaller amounts of working capital.