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Secured and unsecured loans
When looking to raise funding for your company, you’ll probably be given quotes for different types of loans.
Generally speaking, these loans tend to fall into one of two categories: secured and unsecured.
There are some significant differences between these two sources of business finance, which many business owners will be unfamiliar with.
However, once you understand how each of these loan structures work, you’ll be in a better position to determine which avenue of funding is best for your business.
So, how exactly do secured loans differ from unsecured loans, and what are the advantages and disadvantages of each?
What is the difference between secured and unsecured loans?
The main difference between secured loans and unsecured loans is the presence or absence of collateral. While secured funding options require borrowers to offer assets against the debt, unsecured loans do not.
Key differences:
Unsecured loans don’t require security through the form of collateral. This type of loan is a good option for borrowers who don’t want to risk their assets.
Secured loans help borrowers raise larger loan amounts. However, if a borrower defaults on secured loan repayments, the lender has a legal right to reclaim the assets put forward as collateral.
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 | Asset valuation required | |
Easier qualifying criteria | Risk of losing assets | |
Unsecured Loans | No risk of losing assets | Often require a personal guarantee |
Shorter repayment terms | Lower loan amounts available | |
Faster application process | Higher interest rates | |
Loan top ups available | Risk of negative impact on credit score |
Secured or unsecured - which is better for my business?
Both secured and unsecured loans have advantages and disadvantages, so there’s no one rule that fits all when it comes to deciding which is the better borrowing option. With lots of factors to consider before applying for an unsecured or secured loan, take time to think about:
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 any decisions, it’s a good idea to compare secured and unsecured loans in more detail using the information provided below.
What is a secured loan?
Secured loans require businesses to offer something as security against the debt, which could either be company or personal assets, including property. This type of debt product is protected by the assets put forward by the borrower, usually referred to as security or collateral.
During the secured loan application process, the value of the asset offered will help to determine the available loan amount. As a result, a secured loan is a viable option for businesses that need to borrow a large sum of money, typically anything above £200,000.
In the event a business or individual defaults on a secured loan, proceeds from the sale of these assets can then be used by a lender 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 enable businesses to access higher amounts of capital.
Because the debt is secured against company or personal assets, secured business loans tend to be less risky for a lender, which might offer lower interest rates and longer repayment terms as a result.
Secured loans can also be a route to funding for companies with a less-than-perfect credit history, especially if they have valuable assets that can be offered as security against the loan.
Disadvantages of secured loans
A secured loan can be a riskier form of funding for borrowers, as it means putting their assets – and potentially the personal assets of directors – on the line.
While secured loans tend to come with lower interest rates, some lenders will ask for additional fees upfront, increasing the price of borrowing. A borrower may also need to foot the legal costs if a lender is applying for a first or second charge over a company’s property, for example.
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 is a type of loan that doesn’t require a company to put up any company collateral as security. The loan amount is based on the borrower’s financial history and creditworthiness, which makes unsecured loans suitable for businesses that are looking to borrow a smaller amount of capital, or are unwilling or unable to secure the debt with company assets.
Unsecured debt agreements do not give lenders legal claim to assets in case of default. However, most unsecured loans will require a personal guarantee, which is a written promise from a business owner – and possibly its directors – guaranteeing payment of the loan if the business fails to keep up with repayments.
Unsecured loan examples:
Unsecured business finance
Merchant cash advance
Personal loans
Credit cards
Student loans
Business overdrafts
Revolving credit facilities
Advantages of unsecured loans
In theory, unsecured loans are a less risky borrowing option because there’s no danger of losing any assets if you can no longer repay the debt. They can also offer more flexibility than secured loans, with lenders tending to offer repayment terms of anything from one month to three years.
As it’s not secured against property or other collateral, many lenders will be happy to top up an unsecured loan once a company has made a certain number of successful repayments, and will also offer repayment holidays as an additional benefit.
Disadvantages of unsecured loans
Because they’re not backed up by any assets, unsecured loans pose more of a risk for lenders. This means there’s a limit to how much you can borrow on an unsecured basis, with most lenders capping their unsecured loans at anywhere between £50,000 and £300,000.
To mitigate the risk of unsecured lending, most lenders will also charge higher interest rates on unsecured loans, with lower rates only available to companies and individuals with a strong credit history.Is an unsecured loan right for your business?An unsecured loan might be a good fit if you require a short-term injection of capital and your business and its shareholders have a relatively strong credit history. Unsecured loans are a popular solution for companies looking to manage their cash flow in periods when sales are usually slower, with some lenders offering a revenue-based repayment option, allowing business to repay at their own pace.Unsecured loans may come with higher interest rates, but several lenders will let you repay early at no additional cost, and won’t charge any upfront fees. They’ll also offer flexibility on repayment terms, with the added benefits of top-ups and repayment holidays, which won’t normally impact any future borrowing.
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
Here at Fleximize, we offer both secured and unsecured loans, meaning you can choose which type of financing will best suit 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. Up to £25,000 for non-limited partnerships and sole traders. | Up to £500,000. |
Eligible assets | - | Commercial or personal property, |
Personal Guarantee | Required for sole traders and non-limited partnerships. 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 |
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