Final answer:
Secured business loans require collateral, offering the lender asset protection, while unsecured loans do not require collateral, posing more risk to lenders. Small businesses often leverage bank loans due to the banks' ability to monitor the company's financials closely, whereas larger firms frequently issue bonds to raise capital.
Step-by-step explanation:
Differences Between Secured and Unsecured Debt
The key difference that distinguishes a small business loan from a bank as secured debt from unsecured debt lies in the presence or absence of collateral. Secured debt requires the borrower to provide an asset as collateral for the loan. This means that if the borrower fails to repay the debt, the lender has the right to seize the asset to recover the owed amount. Conversely, unsecured debt doesn't require any collateral. If the borrower defaults on an unsecured loan, the lender doesn't have a direct claim on any specific asset of the borrower, making it a riskier proposition for the lender.
Bank borrowing is often more customized and relationship-based, which can be especially beneficial for small businesses that may not have extensive financial histories. Banks may provide these loans after closely monitoring the company's sales and expenses, as seen through its banking transactions. In contrast, larger, well-established firms may opt for issuing bonds to a wider market of investors to secure financing for new capital or investments. It's important to note, however, that there are exceptions to these generalizations as firms of various sizes may choose different financial instruments depending on their specific needs and circumstances.