Secured vs Unsecured Business Loans – What are they and are you eligible?
When it comes to choosing a business loan, it can be difficult to ascertain which type would be best for you and your business. This article will discuss the differences between secured and unsecured business loans, the pros and cons of each type and the likelihood of the business owner being eligible for obtaining the loan.
First of all, we will differentiate between the two options. With secured business loans you must offer some form of collateral; in the event of the business defaulting and unable to repay the loan, the lender has the right to seize the collateral to recoup what they are owed. Types of collateral can vary from property, equipment or inventory to outstanding invoices and cash.
Conversely, unsecured loans do not require any collateral – and in the event of defaulting on this type of loan, there may be legal action taken to collect the debt. As there is less security for the lender, this does mean that interest rates on repaying the loan are higher. There is also the possibility that the loan amount itself may be lower due to not having the security that offering collateral has. The more secure a lender feels that the business will be able to repay the loan, the more likely it will be that the business will be eligible.
Another way for a lender to feel confident that a business can repay is if they have a higher credit score – something that is not as important in a secured loan. There is also the possibility of offering a personal guarantee – this is more likely to be required in an unsecured loan but may be required in a secured loan also. It is all about helping the lender to feel confident in your ability to repay, while managing the impact the level of risk will have on your company.
| Secured business loan | Unsecured business loan |
| Collateral is required | Collateral is not required |
| Personal guarantee is not always required but lenders may ask for one | Personal guarantee is not always required but lenders may ask for one |
| Higher borrowing limits | Lower borrowing limits |
| Lower interest rates | Higher interest rates |
| In event of default, the lender seizes the collateral | In event of default, your credit score will be impacted and there may be legal repercussions |
The Pros and Cons – which to choose?
It is important to weigh up the advantages and disadvantages of both secured and unsecured loan; the element of risk involved and the impact it could have on your company are hugely important.
With secured loans, the lower interest rates and potentially higher borrowing limits are certainly advantages. It is also more likely that you will be eligible for a secured loan when you offer security to the lender in the form of collateral – however the value of the collateral must be high enough to cover enough of the loan value, as specified by the lender. It can also be more time-consuming to have the collateral assessed, if you have time constraints this could be an issue; but if time is not of the essence, then this need not be a concern. The main consideration to take into account is the possibility of losing assets if you are unable to repay your loan – hopefully this would not be the case, but it is something to bear in mind.
The primary advantage of choosing an unsecured loan is not having to offer collateral, meaning you do not have to run the risk of losing your assets. It may also be a faster process as time will not need to be spent appraising assets – this is often favourable if you need the loan urgently and do not want to wait. An unsecured loan also eradicates the issue that new-start businesses often have, in not having any assets to offer as collateral. However, it must be taken into consideration that lower loan amounts are usually offered when the loan is unsecured, and they can be more expensive to repay. It is also often more difficult to obtain an unsecured loan as eligibility criteria including credit history can be more difficult to meet.
Advantages and Disadvantages
| Secured business loan | Unsecured business loan |
| + Save money with lower interest rates | + Do not need to offer collateral |
| + Ability to borrow more | + Faster process as appraisal of assets isn’t required |
| + Easier to qualify for | + Doesn’t matter if you do not own any assets |
| – Risk of losing assets | – Higher interest rates |
| – Time-consuming to have assets appraised | – Lower borrowing amount |
| – Stricter eligibility |
Conclusion
It is important to weigh up these aspects and make an informed decision as to what is best for you and your business. There are many factors to consider, and it can be difficult to choose not only the type of loan you require, but also which lender will be best to approach. At Contact Business Finance, based in the West Midlands, we have a wealth of knowledge surrounding business finance and can put you in Contact with the most suitable lender in our free-of-cost, confidential service. If you would like to get in touch, give us a call on 01902 219260 or drop us an email at info@contactbusinessfinance.co.uk.