Unsecured Vs Secured Business Loans
Managing Director + Co-Founder
If you want to grow a business, you usually need a loan. Fresh capital provides you with resources to buy equipment, hire new people and offer more locations to make more sales. It’s risky, but the payoffs can be enormous.
While there are various types of business loans available depending on what you need, a business loan will generally be one of two things: secured or unsecured. In this post, we’re going to take a closer look at both secured loans and unsecured loans to give you a clearer idea of which business finance option is best for you.
What Is A Secured Loan?
A secured loan is a type of credit agreement where a lender agrees to lend you an amount of cash , and in return, you give them security over a residential property. Secured loans are repaid either with business revenue or, failing that, by selling assets. The term “secured” therefore refers to the fact that the lender will require security in the form of a UK property.
Lenders won’t typically provide a secured business loan up to the full value of the property, but will typically lend up to 75% Loan to Value. For example, if you own a property worth £100,000, without a mortgage on it, they will look to lend up to £75,000. If you did have an existing mortgage outstanding on the property they will have to deduct the outstanding balance to give you a net figure.
Secured business loans can seem risky for some owners, but there are benefits that, for many, will outweigh these risks – especially where small businesses are concerned. A small business loan can be difficult to obtain; you may require a personal guarantee as well as a decent credit rating, which as a new business you may not have. Secured loans are therefore a popular choice among many small business owners due to them having less risk for the lender.
Lenders typically offer secured loans to any business as long as they have a property with enough equity to secure the loan against.
Here are some of the things you’ll need when applying for secured loans:
- Full name of the business
- Details of all guarantors
- Permission to perform personal searches
- Amount required
- The term of the borrowing
- The reason funds are required
- Details of the security property (including full address, approximate value, and details of any existing charges)
What is an Unsecured Business Loan?
Unsecured business loans (sometimes referred to as unsecured finance) can be used for virtually any business purpose, from business growth and stock purchase to settling bills and refinancing existing debt. They can be a fantastic option for businesses that have been trading for over 1 year and a good credit history. The key difference between secured and unsecured business loans is that unsecured loans don’t require any collateral, meaning tenants and people living with family/partners can also access this facility for their business With unsecured loans, the lender sends you cash and you promise to pay them back in the future – both the principal amount, plus some interest depending on the lender.
Unsecured business loans are a great way to inject some much needed capital into your business, without the need to provide security in the form of a property. They are becoming easier to access with the amount of unsecured providers in the market, so you don’t need to have the best credit history in the world. Unsecured business loans are also becoming cheaper than ever, with rates starting from 3.9% which is cheaper than some mortgages in the market.
One thing to note on an unsecured business loan is that you will need to sign a personal guarantee to secure the facility.
A personal guarantee is an agreement between a business owner and lender, stating that the individual who signs is responsible for paying back a loan should the business ever be unable to make payments.
A personal guarantee is only ever enforced if the business is unable to make repayments and enters into administration or liquidation. Our lenders are all very proud of the fact that their PG enforcement rates are very low, however if you want to learn more please drop us a call on 020 8038 4534.
Alternatively, we do also have a relationship with a personal guarantee insurance company that will cover a certain % of the liability over the course of the term.
Here are some of the things you’ll need when applying for an unsecured loan:
- Last 6 months’ bank statements
- Company accounts
- Personal details of the business director
Secured Vs Unsecured Business Loan: Which is Best For You?
Both secured and unsecured loans can provide businesses with significant growth opportunities, but it’s important that before submitting an application, you fully understand the loan terms and the potential impact secured and unsecured loans can have on your business.
There are a few things to keep in mind when deciding between secured and unsecured loans:
1. Are you willing to offer UK property as security?
This is a key factor when deciding on which loan is best suited for you and your business. Secured loans are likely to be a cheaper option when borrowing money, due to the fact that the lender will take a fixed charge on a UK property. This of course is a less risky way for the lender to advance a loan and will therefore be a cheaper option for you as a business. However, many business owners are either not willing to put a property up as security or they may not be a property owner in the UK, which stops them applying for a secured business loan.
2. How quick do you require the funds?
Speed is becoming more and more important in the world of finance, so obtaining funds fast can offer you the ability to act on opportunities as quickly as possible. Unsecured Business Loans offer a very quick application process, with funds being disbursed as quickly as 24 hours. However, Secured Business Loans can sometimes take up to 6-8 weeks to complete, as there are several legal requirements, as well as a valuation that needs to take place. It all depends on how soon you need that cash flow injection.
3. Flexibility vs cost
Although Secured Business Loans are traditionally cheaper than unsecured loans, they normally come with a lot less flexibility. Unsecured Business Loans allow you to settle early without paying a penalty, as well as making overpayments towards your loan to reduce monthly commitments. A secured loan will normally come with lock-in periods and early settlement fees, so you may want to consider this if you are looking for some flexibility to repay early.
In summary, it comes down to whether you are willing to use UK property as security, as without this a Secured Business Loan is not possible to access. Interest rates are becoming more competitive in the Unsecured space, so flexibility also becomes a key factor when considering what option works best for your business.
Unsecured and Secured Loans at Aurora Capital
In summary, both secured and unsecured business loans have their benefits, so it’s best you speak to one of our experts to understand what option works best for your business.
If you’re interested in seeing what other funding options are available for your business, get in touch with our friendly team today and we’ll get you on the right track.
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