The amounts that a business will need as a business loan will generally be large. Unless, it is a bank that has the utmost confidence in the borrowing enterprise, most banks, and financial institutions will balk at the idea of lending a large sum to enterprises without any guarantee. This explains the genesis of secured business loans.
A secured business loan is one where the borrowing enterprise pledges loan repayment by offering the loan provider a lien of certain asset/ assets.
Borrowers do get business loans without having to pledge any such lien to the loan provider. These are known as unsecured business loans. However, such opportunities are not easily available. And if they are, the terms on which they come are very expensive. The APR that borrowers of the latter category will have to shell is many percentage points more than the Secured business loans borrower.
Would you, as a borrower of a business loan, unnecessarily increase the cost of finance to your business, knowing well that the assets are being pledged and not sold out?
The assets pledged in secured business loans are available for use by the borrower. It is only when the loan is not paid in full that the loan provider undertakes to repossess the asset-forming collateral. Is it that the creditors of unsecured loans do not demand repayment if the borrower doesn’t pay. In this case, the loan provider has to demand repayment.