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Pros and Cons of Secured and Unsecured Loans

Pros and Cons of Secured and Unsecured Loans

When it comes to taking out a loan, many factors can influence the best decision for business operations. Different loans come with different consequences. Sometimes a business may only have a few, or only a single, option to choose from. 

Other times, an owner should carefully consider the short- and long-term consequences of the decision. When it comes to a business loan, the choice of secured against unsecured can matter for financial health throughout the future.

What Is The Difference?

A secured loan is simply any loan that requires collateral. Lenders must carefully assess risk of any loan, determining the financial commitment needed to assuage the likelihood of repayment. 

Collateral can be many things: it may be strictly a sum of money, or it may be a certificate of deposit, or it may be a physical object of value. A home equity loan will use the collateral of the property, giving the homeowner a generous loan, with the consequence that the property may be seized if repayment fails. 

An unsecured loan, on the other hand, requires no collateral. Instead, lenders' approval depends on an individual's credit. 

Related: Why Credit is Important 

Choosing a Secured Loan

The primary factor that affects whether or not a loan is secured or unsecured is the quantity of the money and2-Dec-12-2021-11-19-24-88-PM the credit of the borrower. Credit runs the financial world and for a business loan, a company's credit history tells the lender all they need to know about the relative risk of a loan. 

Stronger credit will reduce the likelihood that a loan will require security. Likewise, a business with relatively little credit history can use collateral to get a secured loan whenever an unsecured loan will not be approved.

Related: Tips For Building Credit to Get a Cannabis Business Loan

A secured loan may have a lower interest rate overall since the collateral reduces the risk of the lender. A loan provider will also be willing to finance a larger loan overall when it is secured by collateral. 

This makes a secured loan valuable for a company that specifically needs to watch its bottom line, or needs a very large infusion of cash. It's also beneficial for a company that has access to collateral that they don't particularly need, allowing them to put the collateral to better use than it might be on its own.

Of course, the biggest risk of a secured loan is the chance of losing the collateral in the event of default. Lenders have extensive experience dealing with default and are not afraid to go for the throat: default may result in the lending institution seizing the business altogether if the amount owed is suitably large enough.

Choosing an Unsecured Loan

3-Dec-12-2021-11-19-26-84-PMSince an unsecured loan can be obtained through non-traditional lenders, they are generally an excellent option for cannabis businesses. For many borrowers, an unsecured loan fits their needs better: it can be approved and processed much faster, and there are fewer fees for assessments or management services. 

Missing a payment on an unsecured loan will give your credit score a hit, but it won't result in the seizure of further assets. Finally, these loans typically have fixed interest figures and repayment plans, making them better for businesses that prefer financial consistency.

The main downside of an unsecured loan is that the overall interest rate can be higher. Additionally, while the collateral is not at stake, the lender can sue the borrower for non-payment, potentially resulting in court fees and a judgment that costs a business much more than they would pay for collateral alone. 

Related:  How To Fund a Cannabis Business Without A Traditional Bank Loan

The Big Picture

A secured loan or an unsecured loan can be the way forward for a business that requires a cash infusion. However, the two choices are not equal, especially in our industry. More traditional bank loans can often come with a lot of hurdles. Unsecured loans may sound like a riskier or unreliable option, but in reality they're a great fit for your growing cannabis business's needs. If you're ready to explore your options, you can get pre-approved within 48 hours. 

Posted by Canna Business Team



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