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Secured and unsecured loans
When seeking business funding, lending falls into one of two options: secured and unsecured. Having an understanding of the advantages and disadvantages of each will help determine which suits your requirements.
What is the difference between secured and unsecured loans?
In simple terms, the main differences between a secured and unsecured loan is collateral. Secured funding allows a business to borrow a larger amount with assets such as property, vehicles or equipment offered as security.
However, if there is a default on a secured loan repayment, the lender has a legal right to reclaim these assets. This is not a necessity for unsecured loans, often making these the preferred option.
What are the main advantages and disadvantages or secured and unsecured loans?
Type of Loan | Advantages | Disadvantages |
Secured Loans | Lower interest rates | Additional upfront fees |
Longer repayment terms | Longer application process | |
Access higher loan amounts | Collateral required | |
Easier qualifying criteria | Risk of losing assets | |
Unsecured Loans | No collateral needed | Often require a personal guarantee |
Shorter repayment terms | Lower loan amounts available | |
Faster application process | Higher interest rates | |
Lower initial costs | Risk of negative impact on credit score |
Secured or unsecured - which is better for my business?
There’s no one rule that fits all when it comes to deciding which is the better borrowing option. However, before applying for a secured or unsecured loan, consider:
How much you need to borrow
How quickly you need the money
Your ideal repayment structure and borrowing term
Your business’s current financial situation
Your credit score and previous borrowing history
Whether or not you have viable assets available
Before making a decision, it’s a good idea to compare secured and unsecured loans in more detail. Additional information is below so you can consider options based on your requirements and circumstances.
What is a secured loan?
For a secured loan, a business is required to offer security against the debt. This could be company or personal assets, such as a property. This means the debt product is protected by the assets put forward. It is usually referred to as security or collateral.
As part of a secured loan application, in addition to terms and rates, the value of the asset offered will help determine the available loan amount. As a result, a secured loan is a viable option for businesses seeking higher levels of funding– even up to 100% of the value of the asset if you borrow from Fleximize. This could make a secured business loan perfect for investing in your growth or covering a gap in cash flow.
A secured loan could be used to:
- purchase commercial property
- finance the refurbishment of premises
- cover the cost of machinery
- boost cash flow to complete a management buyout
Should a business or individual default on a secured loan, the lender could repossess the asset before selling it, using the proceeds from the sale to pay off any outstanding debt.
Secured loan examples:
The most common examples of secured loans include:
Secured business finance
Mortgages
Car loans
Homeowner loans
Advantages of secured loans
One of the main advantages of secured loans is that they provide access to a higher amount of capital. As the debt is secured against a company or personal assets, secured business loans tend to be less risky for a lender, which may result in lower interest rates and longer repayment terms.
Secured loans can also provide companies with a less than perfect credit history with funding, especially if they have valuable assets that can be offered as security.
Disadvantages of secured loans
While secured loans tend to come with lower interest rates, they require borrowers to pledge assets to reduce the risk for lenders in case the business is unable to meet repayments.
Also, some lenders will ask for additional fees upfront, which can increase the overall cost of the loan. By using a business loan calculator, you can work out the total cost of borrowing, including additional fees, for each quote you’ve received.
Is a secured loan right for your business?
Secured loans can be used for a number of purposes, from the purchase of new property or machinery, to the extension or refurbishment of existing premises. They could also be used to fund the acquisition of a competitor.
If there are assets that you, or your shareholders, can put up as security, a secured loan might be a good option for your business. You may have to pay off the loan over a longer term, but you could be offered a favourable interest rate, reducing your monthly repayments and the overall cost of borrowing.
However, if you're based in Northern Ireland or Scotland, you won't be able to apply for a secured loan with us, so an unsecured loan may be a better fit.
What is an unsecured loan?
An unsecured loan does not require a business to put up any assets as security. The loan amount is based on a borrower’s financial history and creditworthiness. This makes unsecured loans more accessible to businesses that would prefer not to offer collateral against a loan (or do not have assets). Unsecured loans are used for many purposes including managing unexpected costs, purchasing new equipment or to bridge cash flow gaps.
An unsecured loan does not give a lender a direct legal claim to specific assets in the event of default. However, it’s likely a personal guarantee, a written promise from a business owner (and potentially directors), is required.
Unsecured loan examples include:
Unsecured business finance
Merchant cash advance
Personal loans
Credit cards
Student loans
Business overdrafts
Revolving credit facilities
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Advantages of unsecured loans
Unsecured loans can provide more flexibility as there’s no need to offer collateral, thereby protecting your business assets. This also means the application process is faster and involves less paperwork, with no need for a valuation, leading to quicker access to funds.
In addition, they avoid the initial costs associated with asset appraisals and legal charges, making them more accessible for businesses needing fast finance.
Disadvantages of unsecured loans
Unsecured loans do pose more of a risk to lenders as no assets are offered as collateral. This means there is a limit to how much a business can borrow. Many lenders cap their unsecured loans at between £50,000 and £300,000. To mitigate risk, lenders may also charge higher interest rates, with lower rates for businesses with a strong credit history.
Secured and unsecured: making your mind up
Whether you’re considering a secured or unsecured loan, or another type of funding altogether, it’s essential to know exactly what you’re agreeing to. before signing on the dotted line. Taking on debt is a risk, but with all of the right information to hand, you’ll be able to identify the best solution for your business.
Secured vs unsecured loan requirements
At Fleximize, we offer both secured and unsecured loans, so you can choose which type of finance is the best fit for your business. Our secured and unsecured lending products have unique requirements and features which you can compare below:
Requirement | Unsecured Finance | Secured Finance |
Business type | Limited company, LLP, non-limited partnerships, sole traders | Limited company, LLP |
Location | Based in the UK | Based in England or Wales |
Trading history | 6 months + | 6 months + |
Monthly turnover | £5,000 + | £5,000 + |
Compare unsecured and secured loan features:
Feature | Unsecured Finance | Secured Finance |
Loan amount available | Up to £250,000 for limited companies and LLPs. From £25,000 for non-limited partnerships and sole traders. | Up to £500,000. |
Eligible assets | - | Property, equipment and machinery, vehicles, inventory, accounts receivable, intellectual property. |
Personal Guarantee | May be required for limited companies and LLPs. | May be required for limited companies and LLPs. |
Interest rates | 0.9% + | 0.9% + |
Fees | No additional fees or early repayment fees charged. | No additional fees or early repayment fees charged. |
Repayment terms | 3 - 36 months | 3 - 60 months |
Your common questions answered
A secured loan works by requiring you to provide something valuable, like property or equipment, as collateral. If you can’t repay the loan, the lender can take the collateral to cover the debt. These loans usually have lower interest rates because they’re less risky for lenders.
An unsecured loan can be good or bad depending on your situation. It’s good because you don’t need to put up collateral, but it can be bad because the interest rates are usually higher. If you can’t repay, it could hurt your credit score.
The difference is that a secured loan requires collateral, like property, while an unsecured loan does not. Secured loans usually have lower interest rates, but unsecured loans are riskier for the lender, so they may cost more in interest.
Yes, an unsecured loan is a form of debt. Just like with any loan, you have to pay back the money you borrow, plus interest. Since there’s no collateral, the lender relies on your promise to repay and may take legal action if you don’t.
Unsecured loans can hurt your credit score if you don’t make your payments on time. If you miss payments or default on the loan, it can negatively affect your credit. However, if you pay it back on time, it can help build your credit.
An unsecured loan is risky for lenders because there’s no collateral to back it up. This means if you don’t repay the loan, the lender has no property or assets to take to cover the debt. This higher risk is why unsecured loans often have higher interest rates.
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