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Simply, unsecured funding is when a borrower takes funding with no upfront collateral. If the borrower defaults, the funding company can go through several different avenues to get the money back, including filing a lien against the borrower or taking them to court. Signature loans and good faith loans are other names for unsecured funding. This type of funding is a lower risk to the borrower but higher risk to the funding company. This means higher interest rates or repayment terms. Line of credit and merchant cash advance are a few of the different types of unsecured funding for small businesses.
On the contrary, secured funding is when a borrower takes funding in exchange for an asset or collateral. If the borrower defaults, the funding company can use that asset to repay the funds. Home mortgages and auto loans are popular types of secured funding. The home or the car is used as collateral in case the borrower defaults. This type of funding is less of a risk to creditors, so they tend to have lower interest rates.
It is good to know whether your business funding is a secured or unsecured funding source. Be sure to talk with the funding company to understand everything involved with receiving funding for your business, including any collateral. If no collateral is required, it is still good to know what steps the funding company may take in the event of a default.
This content is for educational or informational purposes only and should not be taken as legal or financial advice. The information in this content does not necessarily reflect the views of Coast Funding Services LLC or its partners.