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Secured and unsecured loans can help businesses to expand and ultimately fulfil their potential over time, but there are notable differences between the two forms of business funding.
Secured Loans require you to provide collateral to the lender, which reduces their risk. Collateral might be a hard asset, such as machinery or equipment, for example, but you can also use intangible assets as security for a business loan.
Unsecured loans, on the other hand, don’t need any form of security and are less risky for the borrowing business.
Using assets as collateral
When you take out a secured loan you must put forward one or more business assets for use by the lender as collateral. A charge is placed on the asset, which allows the lender to repossess if your business is unable to repay.
Unsecured assets don’t require this security and lenders use your businesses’ creditworthiness to determine eligibility. This means that your credit score and the general financial health of your company come into play.
Interest rates and loan terms
Secured business loans typically offer lower interest rates, higher borrowing amounts, and longer terms due to the lower risk to the lender. An unsecured loan is likely to attract a higher interest rate and less favourable terms in comparison but also entails less risk for your business.
Speed of access
Secured business loans commonly take longer to arrange and put into place, as the lender must value the asset(s) you’re putting forward as collateral and carry out due diligence. With no assets to value, an unsecured business loan can be accessed more quickly.
You may be able to borrow larger sums via a secured business loan, which can be useful if your credit rating is poor or you need to invest in expensive assets. A longer-term and lower interest rate may also make the loan more affordable on a month-by-month basis. It’s also important to consider whether the business can sustain the repayments over an extended length of time.
An unsecured loan may meet your needs if you need fast access to funding, but the lender could require a personal guarantee, which introduces a risk to your personal finances. If no guarantee is needed and you’re comfortable with potentially more unfavourable terms when compared with a secured loan, unsecured lending may be more appropriate.
UK Business Finance can provide the professional guidance you need before going ahead with a business loan application. We’re highly experienced commercial finance brokers and search the whole-of-the-market for the best quotes for our clients.
With so many forms of alternative funding now available to businesses, it’s worthwhile finding out if other types of finance would be more suitable for your business. Please get in touch to find out more.
We work across a wide range of sectors throughout the UK, providing specialist advice to each sector.
Can I use property as security for a business loan?
Secured business loans require one or more assets to be put forward as collateral. This protects the lender from financial loss if a company cannot afford to keep up with the repayments at any stage.
Does my company have a credit score and how can I improve it?
Limited companies do have credit scores and they’re used for a similar purpose as individual credit ratings. Lenders use them as a guide to creditworthiness, but a business credit score is also useful for suppliers and investors to gain insight into your company’s financial situation.
What is bad debt and how can I protect my company?
Bad debt presents an insidious threat to the financial stability of your business. It places strain on your working capital and creates uncertainty in paying your bills, but this can be addressed successfully if you take proactive steps to protect your company.
What is the difference between open and closed bridging loans?
Bridging loans are short-term forms of secured finance that literally ‘bridge’ a gap between funds going out of a business and monies coming in.