Businesses face many financial hurdles in the course of their operation. The obstacles could be as a result of the lack of working capital, or finances to pay overhead costs, or to cover for emergency expenses. A loan helps overcome such hurdles, and depending on the obstacle to be overcome, the business can choose either secured loan, unsecured loan, or self-secured loan.
These types of loans are classified based on the nature of security required or its absence.
Secured loansSecured loans require collateral. An asset such as a motor vehicle is used to secure the loan to give assurance of repayment of the loan. In default of payment, the asset is forfeited to the financial institution.The advantage of a secured loan is that it has more favorable lending terms, such as lower interest rate, longer repayment length, and flexibility on the type of asset used as collateral. The only catch on the asset is that its value has to be commensurate with the value of the loan sought.The downside of secured loans stems mainly from the fact that the amount of the loan is always directly proportional to the value of the asset used as collateral. It, therefore, means that businesses lacking in assets or with an asset of lower value stand not to benefit much from secured loans.
Unsecured loansUnsecured loans are mostly online-based. They require no collateral at all. The financial institution lends money based on subjective variables such as the credit rating of the business. The most common example of an unsecured loan is credit cards.An advantage of unsecured loan is that the business need not have high-value assets or any asset at all to get a credit facility. Unsecured loans also take a relatively shorter period to process as steps such as valuation of property isn't needed. The transactions are carried out online without the need to physically visit the institutions offering the credit facility.Its disadvantage is that it charges higher than standard interest rates. The high interest rate is necessary to balance the high risk of default associated with lending without collateral. It also requires one to have an excellent credit history to qualify for lending.
Self-secured loansIn a self-secured loan, the equipment purchased using the borrowed money acts as collateral. The money advanced is used to buy a specific asset that can be repossessed by the financing institution in case of default.Its advantage is that the borrower stands to lose no other asset of its own in case of default, and only forgoes the equipment that was bought using the proceeds from the loan advanced. The interest rates, too, are on the lower side compared to unsecured and secured loans.The disadvantage of self-secured loan is that it's limited in scope. The business must, therefore, have a specific financial need and stick to it before approaching a lending institution for a self-secured loan.
