Business loans fall into two categories: secured and unsecured. Both can provide the funding your business needs, but they work quite differently. The right choice depends on your circumstances, assets, and how quickly you need the funds.
To summarise, the primary difference between the two is the use of security:
- A secured business loan requires security in the form of business or personal assets as a guarantee for the lender.
- An unsecured business loan doesn’t require this, but lenders may ask for a personal guarantee instead.
Here’s a closer look at how the two compare.
Security requirement
Secured business loans require you to pledge assets as loan security. This can include property, equipment, inventory, accounts receivable, or other valuable business assets.
Unsecured business loans don’t require any security. Instead, lenders base decisions on your creditworthiness, business strength, and financial standing.
Interest rates
Because secured loans are backed by assets, lenders view them as lower risk. If you default, the lender has an asset to fall back on to recover the debt. This generally means secured loans carry lower interest rates than unsecured business ones, which pose greater risk for the lender.
Loan amount
The value of the security often determines how much you can borrow on a secured loan. Lenders may offer a percentage of the asset’s appraised value.
Unsecured loan amounts are typically based on your creditworthiness, financial standing, and ability to repay. These loans are often capped at a lower level than secured borrowing.
Loan term
Secured loans can come with longer terms, allowing you to spread repayments over a longer period. Unsecured loans tend to have shorter terms, resulting in higher monthly repayments over a tighter timeframe.
Speed of approval
Unsecured business loans are often quicker to arrange because there’s no need for asset valuation or the legal work involved in securing a loan against property or other assets. If you need funding quickly, this can make unsecured finance the more practical option, even if it costs more. However, set-up costs will be much lower with no legal or valuation fees.
Secured loans usually take longer to complete, largely because of the valuation and legal processes required to register the lender’s interest in the asset. For time-sensitive purchases, factor this into your planning early.
Risk of asset seizure
If you default on a secured loan, the lender can seize and sell the asset to recover the outstanding debt. With unsecured loans, there’s no specific asset tied to the loan, so there’s no risk of a particular asset being seized. However, the lender may still pursue recovery through other means, including any personal guarantee given.
Which option is right for your business?
There’s no single right answer. The best fit depends on:
- Whether you have suitable assets to offer as security
- How quickly you need the funds
- The size of the loan you require
- Your business’s credit history and financial strength
- How comfortable you are putting assets on the line
A business with strong assets but a shorter trading history might opt for secured finance to access better rates. A business that needs funds quickly, or doesn’t want to tie up assets, might prefer the flexibility of unsecured borrowing, even if it costs more.
In summary
Secured business loans require security but typically offer lower interest rates and longer repayment terms. Unsecured business loans don’t require security, but usually come with higher interest rates, shorter terms, and lower borrowing limits.
The right choice depends on your risk appetite, creditworthiness, and ability to offer security, as well as how quickly you need the finance in place. If you’re unsure which route suits your business, speaking to a broker who can assess the whole picture, rather than just what one lender offers, is often the quickest way to find clarity.
If you’re unsure which route is right for your business, we can talk you through your options and help you find the finance that suits. Find your local finance expert here.
