In this article we’re going to explore the differences between unsecured and secured loans. When it comes to raising finance for your business, you’ll likely to encounter both of these finance options. While they share a lot in common, their differences can make all the difference when it comes to deciding which option to take.
What are unsecured loans?
Unsecured business loans are pretty much what they sound like – it’s a loan taken by the business where no security is taken by the lender. Lenders offering unsecured loans will typically consider the business’s turnover, profitability and credit history when determining whether to make an offer.
Typically the application process for an unsecured loan is fast and simple, with minimal documentation required. Typically your business will receive funds in under a week after applying for an unsecured loan.
While no tangible security will be taken, it’s important to note that most lenders will ask for a personal guarantee, which can put your personal assets at risk if your business is unable to meet the loan repayments.
Advantages of Unsecured Loans
- You can get the money faster for your business compared to other types of loans
- No upfront costs (lenders often charge an arrangement fee however this is typically deducted from the loan amount)
- Often lower risk – no tangible security will be taken by the lender
- Great for businesses with strong cash flows and minimal assets
Cons of Unsecured Loan
- Unsecured loan amounts are typically lower than other types of financing available
- Typically higher interest rates compared to other borrowing options
- Harder for businesses with lower credit scores to receive unsecured loans
Secured Loan
A secured business loan is backed by some form of security. While the security can be any type of business asset, most lenders calling themselves “secured” lenders will typically take security over a property. This can be a residential property owned by the director(s) or a commercial property. Some lenders can also take 3rd party security (e.g. security offered by someone unrelated to the business) in order to maximise the amount raised.
Advantages of Secured Loans
- Typically your business will be able to borrow more money with a secured loan as the security value will also be taken into consideration when issuing the loan offer
- For businesses with a poor credit history, secured loans will allow the business to raise critical funds when unsecured loans may not be available.
- For businesses with strong credit, the interest rate will usually be lower when taking a secured loan vs an unsecured loan.
Disadvantages of Secured Loans
- As the lender will take a charge over the security, your asset is directly at risk if the business is unable to repay the loan.
- It can take longer to receive the funds as the lender will typically get the property valued by a third party and conduct legal due diligence.
- Upfront costs – in most cases you will be required to pay the legal and valuation fees upfront
- While secured loans can be a cheaper option, for businesses with a poor credit history secured loans can be very expensive.
Which business loan is right for your business?
There are a few factors which you want to be aware of while deciding which business loan is right for your business. With an unsecured loan you’re able to get money into your business faster than a secured loan, however the amount of money you receive may be lower than what you’d receive with a secured loan. If you’re seeking out a safer alternative where there is lower risk to your assets, then unsecured loan options may be more suitable. Although a secured loan gives you more capital and may interest rate, you will be putting your asset(s) as a security which can be more risky if you fail to repay the loan.
Hopefully you have a more clear understanding of which option is right for you.
If you’d like more information about which type of loan might be more suitable for your business, or would like to explore other types of funding available to your business, fill out our application form or leave your contact details and one of our team will get in touch to learn more about your business and explore your suitable finance options.