The first thing to note, these definitions refer to lines of credit so that we can talk in specifics. With Invoice Factoring, there’s no collateral at all, you’re just selling an invoice to a factor in exchange for an advance payment. It doesn’t need to be more complicated than that, but sometimes it is. Let’s get into secured vs unsecured!
You put an asset or group of assets on the table as your collateral. This could be commercial real estate, the equipment your business owns, or even personal assets like your home. This can be a little bit scary because if you default on the loan, the lender has the ability to foreclose on those assets you’ve listed in the deal.
Unsecured loans mean that it’s secured against your creditworthiness. The lending institution trusts you based on the business you’ve done in the past with other lenders. With an unsecured loan, you don’t list specific assets, but if you default the lender will likely sue your business (or you personally) and–if they win–will start foreclosing on your assets until they have made their money back.
The difference in secured vs unsecured loans is the risk that the lending institution is taking on, which is directly reflected on your rates. Unsecured loans have higher rates. Higher risk for your lender generally means a higher rate for you.