Unsecured vs Secured Commercial Loans: The Differences

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Unsecured vs Secured Commercial Loans: The Differences

 

 

1aupload8.5x11bugAll commercial loans take on one of two forms. They are either secured or unsecured. Learn the important differences between the two types and the particular benefits of secured loans.

 

Unsecured loans do not involve a pledge of collateral or personal assets in order to pay back the loan in the case of default. Meaning the lender will not be able to automatically seize personal property in order to pay off the outstanding loan balance. Without collateral to fall back on, lenders are particularly wary about to whom they offer unsecured loans. Lenders deem unsecured loans as high risk and only offer them to the most credit worthy borrowers. Businesses seeking an unsecured loan should have a solid history of profits going back at least two years and an excellent business credit score. While unsecured loans do not put business owner’s personal assets at risk, they usually come with exorbitant interest rates. These interest rates can be higher than those charged on a regular business credit card. Unsecured loans are often short term as lenders will want these loans paid off as soon as possible.

A secured loan is the opposite of an unsecured loan. These loans are secured by some asset and require the borrower to pledge some property up front. In the case of a business loan this can be the property from which the business operates, or the owner’s personal property such as their primary residence or any property which can be liquidated in case of default. Secured loans are ideal for businesses without an established track record or without a solid business credit score. Having property available to pay off the loan puts lenders minds at ease.

Why would anyone want a secured commercial loan in the first place?

 

Secured loans put the borrower’s personal property at risk. With so much to lose why would anyone want a secured loan in the first place? Secured loans are much easier to qualify for and may be the only option for some borrowers. In addition secured loans are offered at lower interest rates, for larger amounts and come with longer terms than unsecured loans. Business owners with a secured loan can pledge their primary residence as collateral. Business owners who borrow against their house can therefore write-off interest payments on a secured loan. Unsecured loans don’t offer these tax benefits for borrowers, because no property is ever collateralized.

Even with these benefits there are some dangers involved in with secured commercial loans.

 

When a borrower pledges property as collateral they should perform their due diligence and get a thorough appraisal of the property being pledged. Lenders will often markdown the value of underlying assets when it comes to secured loans. When assets are repossessed a lender will often sell off these assets at a discount. If a borrower over estimates the value of the property they are pledging, the sale of this property may not cover the cost of the outstanding loan and therefore put more of the borrower’s personal assets at risk.

Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
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About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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