Secured and unsecured business loans: What’s the difference?

13/02/2020

Everything you need to know about secured and unsecured business loans. Which would be best for your business?

When companies need a cash flow boost or require a funding injection to achieve or overcome something, many decision makers approach us to help them find the right loan for their business.

Beyond this, however, they don’t always know which type of loan would best suit their circumstances and requirements.

The funding market has evolved considerably and continues to do so. There are now many different types of business loans available to suit companies of all shapes and sizes.

Here we cut through the jargon and explain the features, benefits and potential downsides of secured and unsecured business loans.

What is a secured business loan?

Secured business loans have been offered by mainstream banks for years. They get their name because collateral is provided to secure the loan.

This provides protection for the lender in case the loan defaults as they can sell the assets if the business fails to keep up with payments.

As secured loans are considered less risky, lenders are often prepared to advance higher sums than through unsecured loans.

And, because the finance is secured against the business’s assets, the lender may be able to consider lending even when there is less than ideal credit history. This makes them more accessible to newer businesses or those with limited credit history.

Advantages of a secured loan

Relatively straightforward option
Ability to raise larger sums
Interest rates and charges are competitive and risk-based
Typically easier to access than unsecured loans
Tend to be available over a longer repayment period

Potential disadvantages of a secured loan

The assets that secure the loan are at risk and may be repossessed if you are unable to keep up with repayments
The application process may require a pre-lend survey and valuation of assets
Repayment terms are often fixed and can include early repayment charges

What is an unsecured business loan?

In contrast, an unsecured business loan does not require security. Instead, it is based solely on financial integrity, business track record and risk assessment.

This is particularly good for businesses who don’t have available assets to utilise as security and would, therefore, be unable to access the necessary levels of funding through other forms of finance.

However, because an unsecured loan does not require any collateral, the greater risk to the lender is reflected in its costing and fees to the borrowing business.

To qualify for an unsecured loan it is usually essential that the business’s directors are homeowners, have a good credit history and credit scores and are perceived to pose little risk.

It is worth noting that the lack of security available places a higher emphasis on the performance of the business and its financial standing.

Advantages of an unsecured loan

Easy application and faster decision processes
No need to have any business assets
Available where there is a reasonable credit score
Good fit for growing and fast-paced businesses
Usually, fixed interest rates apply over the term of the facility, so you will know the level of repayments throughout

Potential disadvantages of an unsecured loan

Solid trading history and ongoing potential need to be demonstrated
A personal guarantee may be required
Risk-based fee structure applied, so can be difficult to secure without a reasonable credit score

Which loan would be best for my business?

With so many business loan providers to choose from and varying lending criteria to meet, it is not always straightforward to identify the right solution and find the most competitive rate.

Working with an independent commercial finance broker such as Hilton-Baird Financial Solutions could be the key to sourcing the best business loan for your needs.

We have introduced thousands of businesses to the funding facilities and lenders that offer the optimum level of support over the short, medium and long term.

To see how we could help source the most suitable loan for your business, request a call back to speak to one of our expert funding consultants or get an instant quote: