What is an unsecured business loan?
An unsecured business loan allows you to borrow without having to secure the loan against any business assets, such as property, equipment or machinery. These loans are a relatively simple – and fast – way to get an affordable cash injection if your business lacks assets or if you don’t want to secure what assets you have against your loan.
There are many UK lenders who can offer your small business funds for working capital, growth or expansion and if you like the idea of fixed, monthly repayments within an agreed time frame, a business loan (whether unsecured or secured), could be your best option.
What is a secured business loan?
A secured business loan allows you to use an asset – or the total value of multiple assets – as security against the amount you borrow. The lender uses your asset(s) as a form of guarantee and is therefore often able to offer better repayment terms than you’d find with an unsecured loan.
Business loans are typically secured against property, equipment, machinery or land – but lenders might use any high-value assets that either you or your business might own. There are other types of secured lending though. For example, invoice finance allows you to use your invoices and accounts receivable (i.e. money owed to your business) as security for a loan.
With a secured loan, the security reduces the risk for lenders, therefore increasing your chances of getting a loan, but also allowing you to borrow more money, for a longer term – and you’ll be offered better interest rates compared to those for an unsecured loan.
Secured vs. unsecured business loans
A secured business loan uses your assets as security. Usually these assets are tangible items such as commercial property, machinery or vehicles, but there are other types of secured lending which use intangible assets. For example, with invoice finance, you’d use your accounts receivable as security.
If you can’t repay your secured loan, the lender can sell the assets to recoup the cost of the loan, which reduces their risk.
With an unsecured loan, on the other hand, the lender has no security and therefore cares much more about your business profile, for example, your business turnover, trading history and credit score. The lender may also look at your personal credit history and personal assets, and might ask for a personal guarantee.
Unsecured lending is usually more expensive (i.e. interest rates are higher) than secured lending because the lender is taking on more risk. Lenders might also offer shorter terms and smaller amounts.
Unsecured business loans are usually simpler and quicker to arrange, compared to secured loans, because there’s no need for the lender to inspect or value any assets. These valuations involve legal costs, which you’ll have to pay upfront. By contrast, an unsecured loan doesn’t usually involve any additional upfront costs.