SECURED AND UNSECURED LOANS DIFFER IN TERMS OF REPAYMENT FLEXIBILITY AND THE AMOUNT BORROWERS CAN ACCESS . UNSECURED LOANS WILL BE RELATIVELY FIXED IN TERMS OF REPAYMENT STRUCTURE , AND USUALLY HAVE TO BE REPAID QUICKLY . TYPICALLY , IN LESS THAN 12 MONTHS , AND IN SOME INSTANCES , IN AS SHORT AS 6 MONTHS .
SECURED LOANS , HOWEVER , ALLOW THE LENDER TO BE MUCH MORE FLEXIBLE WHEN LOOKING AT REPAYMENT TERMS . THE LOANS CAN BE STRUCTURED OVER A MUCH LONGER TIME FRAME AND PRICED AT LOWER INTEREST RATES .
IN THE EVENT OF DEFAULTING , THERE ARE SUBSTANTIAL CONSEQUENCES THAT NEED TO BE CONSIDERED .
“ IN BOTH INSTANCES THE BORROWER IS LIABLE TO REPAY THE LOAN AND ANY PENALTIES AND LEGAL COSTS INCURRED . IN THE EVENT OF UNSECURED , THE LENDER ONLY HAS RECOURSE TO THE BORROWER DIRECTLY AND THE DIRECTORS AND GUARANTORS IN THEIR PERSONAL CAPACITY . THIS CAN RESULT IN DEFAULT JUDGMENTS BEING MARKED ON THE BORROWERS CREDIT RATINGS , WHICH WILL AFFECT THEIR ABILITY TO BORROW MONEY IN THE FUTURE .”
WHEN IT COMES TO MITIGATING RISK WITH BOTH TYPES OF LOANS , BRENT BELIEVES THERE ARE CERTAIN STEPS TO BE FOLLOWED .
“ NOT ONLY MUST THE LENDER LOOK AT THE CASH FLOWS OF THE BUSINESS AND ITS ABILITY TO REPAY THE LOAN , BUT ALSO THE QUALITY OF THE MANAGEMENT TEAM , MANAGEMENT ' S PERSONAL BALANCE SHEETS , AS WELL AS DOING QUITE A LOT OF WORK ON THE SECURITY ITSELF . THE LENDER NEEDS TO ESTABLISH WHO OWNS THE SECURITY , WHAT IT IS WORTH , IF IT ’ S INSURED AND HOW EASILY IT CAN BE LIQUIDATED IN THE EVENT OF DEFAULT .”
WHILE IT MAY BE A LITTLE LESS COMPLICATED WHEN IT COMES TO UNSECURED LOANS , IT DOES MEAN LOOKING AT THE CASH FLOWS OF THE BUSINESS AND HOW EASILY ONE CAN ACCESS THOSE CASH FLOWS IN THE EVENT OF DEFAULT .
IT ' S ESSENTIAL FOR BUSINESSES TO CAREFULLY CONSIDER THEIR FINANCING NEEDS AND RISK TOLERANCE WHEN CHOOSING BETWEEN SECURED AND UNSECURED LENDING OPTIONS . UNDERSTANDING THE ADVANTAGES AND LIMITATIONS OF EACH CAN HELP ENTREPRENEURS MAKE INFORMED DECISIONS THAT ALIGN WITH THEIR FINANCIAL GOALS AND OBJECTIVES .
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