Secured Vs Unsecured Business Loans

Secured Vs Unsecured

Raising money for a new business can be a challenge. There are lots of funding options for businesses, and getting a loan is an excellent choice for many. There are several loan types to choose from, and one of the main decisions to make is deciding between a secured or an unsecured business loan.

Below, you’ll find our guide to choosing either an unsecured loan or a secured loan for a small business.

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Choosing the best secured loan for a business

A secured loan is typically available from banks and privately-owned lenders and uses property that you own – such as your home or commercial property – as security against the loan amount. As an asset secures the loan, it’s also known as asset-backed lending. This means that you can borrow a set amount, but if you can’t keep up with loan repayments, you could lose your asset.

A company Director might take out a secured loan for a number of reasons, including to raise funds towards acquiring a new business, or raising funds to purchase new machinery, and would have the loan secured against his commercial property.

Advantages of a secured loan:

  • Larger loan amounts – you can borrow more money with a secured loan depending on the amount of equity available in the property you are securing the loan against.
  • Longer periods to pay back – loans can stretch beyond the typical 3-5 years of an unsecured loan, giving you longer to pay the loan back, up to 10 years or more, often with the option of interest only payments or payment holidays.
  • Lower repayments – as the secured loan can be paid back over a longer period, repayments can be lower and more easily budgeted for, which is ideal for a new business where cash flow can be a challenge.
  • Good for poorer credit history – lenders prefer secured loans for borrowers with a less-than-perfect credit history, as they know the amount can be repaid in the event of a loan default.

Disadvantages of a secured loan:

  • Secured against property – if your business doesn’t generate enough cash to meet secured loan repayments and you fall behind with loan repayments, the lender can repossess your home or commercial property.
  • Upfront costs – applying for a secured loan is like applying for a mortgage, and there may be administration fees to pay before you get the loan.
  • Slow to obtain – obtaining a secured loan takes longer as it involves property valuations and legal requirements.

Choosing the best unsecured loan for a business

Available from a wide range of lenders, an unsecured loan doesn’t require property to secure the loan amount. If you have a good credit history, then obtaining an unsecured loan is relatively straightforward.

Examples of unsecured loans for small businesses include cash flow loans and working capital loans, for instance when covering slower off-peak trading periods against peak revenue that you’ll generate in the future to pay back the loan. 

Advantages of an unsecured loan:

  • Smaller loan amounts – An unsecured loan makes sense, especially if you have property and don’t want to expose it to the risk of repossession.
  • Flexible repayment periods – Unsecured loans can have any repayment period, up to around five years. The longer the loan period, the lower the interest rate you’ll be charged on the loan.
  • Good for those already trading – As the loan is unsecured, the lender will assess it against your business’s trading position. They will also perform background checks such as against your credit history, cash flow position, balance sheet, cash reserves and they may ask for a personal guarantee against the loan.
  • Quicker to obtain – Unsecured loans are quicker in their application process, with fewer procedures and legal paperwork.
  • Lower property exposure – no need to put up property as security and lower or no admin costs.

Disadvantages of an unsecured loan:

  • Can be harder to access – if you don’t have a strong trading position, it can be difficult to get a large unsecured loan.
  • Not suitable for large amounts – lenders typically won’t lend large amounts as an unsecured loan even to a stable business, but there are some that will. We can help you access those lenders.

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