A business loan is a go-to solution for expanding a business or to start a new one. Business loans can essentially be categorized into two types—secured and unsecured loans. The basic difference between the two is the use of collateral in a secured business loan, while an unsecured business loan does not have an option for a collateral.

These types of loans have their own distinct advantages as well as disadvantages.

In an unsecured business loan, the total loan amount is strictly based on the income and credit criteria set by the lender’s lending policy. A business would not have to factor in a collateral to back the approval of a loan. Granting a loan amount, be it $5000 or above $500,000, totally depends on the business’ size as well as the credit rating of its financial status. There are some lenders who even offer unsecured credit loans to businesses provided they fit the requirements outlined by the lenders.

A major advantage of unsecured loans is the non-requirement of a collateral to get a loan from a lender. Unlike a secured loan where a collateral can be taken away in the event of a default by a business, there are no such risks associated with an unsecured loan. In case of a business declaring bankruptcy after failed attempts to revive the business, an unsecured loan can be written off by the law; however, a secured loan trades the collateral as the write-off.

Nevertheless, granting an unsecured loan proves to be a high risk for lenders. Hence, the interest rates and other charges would be substantially higher than that of a secured business loan. Consequently, a business can face financial strains due to the interest rate and have a harder time repaying them quickly. Also, lenders do not lend unsecured business loans to those with a below average or an absolutely bad credit history.

When deciding to go for an unsecured loan, businesses should weigh in the fact that a defaulting on such loans will have higher impacts on their credit history.