Bankruptcy, Essay Example

Introduction

Loans are one of the ways people or organizations can get finances to pay bills, purchase equipment and improve services among other uses. However, it is important to understand what any type of loan entails before committing yourself. This involves understanding what is on the terms and conditions as some of them involve personal property and you may end up losing property without realizing.

Secured Loans and Unsecured Loans

The firm can either go for secured or unsecured loan to get finances for purchasing technology equipment. With a secured loan, the firm would have to use some collateral to serve as security for the amount of money borrowed from the bank. The type of collateral or property used should be able to cover for the debt. This type of loans have security in form of property hence the amount of money given is usually large. Since the firm intends to buy technology equipment, large amount of money is needed hence it may have to go for the secured loan.

When it comes to the unsecured loan, there is no property needed for pledging hence the name unsecured. You may only have to give your promise to the creditor that you will repay the debt (Alan Barnes, 2005). Due to its nature, unsecured loans are usually given if the credit rating is good hence the credit history of the firm will have to be good if it wants an unsecured loan.  This is because of the risk involved in such types of loans and most of the banks would normally give higher interest rates as compared to secured loans.

Unsecured loans also involve small amounts of money which may not be adequate for the firm to purchase all the equipment it needs. Most unsecured loans are used for things such as student loans, telephone bills, medical bills, rent and credit card debts which involve small amounts of money.

Defaulting

If the company defaults on the debt it will have borrowed, the bank will have to come for the collateral if the firm had taken a secured loan. This is usually the case with secured loans unless the bank and the firm are ready to agree on new terms for the loan borrowed. If the firm defaults because it cannot make payments anymore under the specified terms and conditions, the bank may agree to new sets of terms that will enable the bank repay all its debt. Otherwise, the firm will lose the property it had used as security for the loan.

If the firm takes an unsecure loan and defaults, there is no collateral that the bank can take hence it has to use different means to make sure the firm has repaid the debt. The creditor may choose to use the services of a collection agency to get the remaining part of the loan from the firm (Kelly Taylor, 2008). In both cases, the bank can also open suit against the firm for defaulting debt and the court may decide what assets the bank may use to cover the debt. This is more so in the case of the unsecured loan as the bank can go after any of your holdings (Superpages.com, 2007).

Defaulting does some damage to the firms reputation and in case of a suit, legal expenditure may cause more harm to the firm’s financial status. The firm may also find it difficult to get any debt in future from creditors since their credit ratings would have been damaged.

Conclusion

In considering what type of loan to go for, some of the factors to be considered include the amount of money needed, interest rates, loan repayment period and other terms and conditions set by the bank. The firm should select the type of loan with care since this will become important when it comes to a point where the firm may need to file for bankruptcy.

References

Barnes, A. (2005, March 16). What is the Difference Between Unsecured and Secured Debt? Retrieved January 16, 2010, from: http://ezinearticles.com/?What-­is-­the-­Difference-­Between-­Unsecured-­and-­Secured-­Debt?&id=20875

Taylor, K. (2008, March 05). Secured and unsecured debt. Retrieved January 16, 2010, from: http://www.associatedcontent.com/article/633691/secured_and_unsecured_debt.html