If you want to grow your business, a loan can help you achieve your goals. Fresh capital can enable you to buy equipment, hire new people, and open more locations to increase sales. There are risks, but the payoffs can be huge.
While various types of business finance are available depending on your needs, a business loan is generally one of two types: secured or unsecured. Understanding how each type of loan works can help you determine which is right for your business.
What is a secured business loan?
A secured business loan is a type of finance backed by a UK residential or commercial property, which the lender can repossess if the loan isn’t repaid.
Lenders usually offer secured business loans up to 75% of a property’s value. That means, if the property is mortgage-free and worth £200,000, you could borrow up to £150,000. If there is an existing mortgage, the balance is deducted to determine how much equity you can borrow against.
While secured loans can seem like a bigger risk, they often have advantages that outweigh the concerns, especially for small businesses. They can be easier to access for new businesses and tend to have lower interest rates as they carry less risk for the lender.
How to get a secured business loan
Most lenders will consider offering a secured loan to businesses that own a property with enough equity to use as security.
The application process for secured loans can be more complex and require more documentation than unsecured borrowing. Here are some of the things you’ll need when applying for a secured loan:
- 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)
Pros of secured loans
- More accessible for businesses with limited or poor credit history
- Higher borrowing limits compared to unsecured fiance
- Lower interest rates may be available due to reduced lender risk
- Longer repayment terms can make monthly payments more manageable
Cons of secured loans
- You need to own a UK property with sufficient equity to use as security
- Your asset is at risk if you fall behind on your repayments
- The approval process is often longer and requires more paperwork
- Upfront costs such as valuations and legal fees may apply
What is an unsecured business Loan?
Unsecured business loans can be used for virtually any business purpose, from business growth and stock purchase to paying bills and refinancing existing debt.
The main difference between secured and unsecured business loans is that unsecured loans don’t require any collateral. They can be a helpful option for businesses that have been trading for over one year and have a good business credit score.
Unsecured loans are available to a wider range of applicants, including tenants or businesses with no property to use as security. The lender provides the funding upfront, and you repay the amount borrowed, plus interest, over the agreed term.
How to get an unsecured business loan
Unsecured business loans don’t require property as security, but you’ll usually need to sign a personal guarantee to secure the funding.
A personal guarantee is a legal agreement confirming that you, as the business owner or director, are responsible for paying back the loan if the business can’t. It’s only enforced if the company cannot make repayments and enters into administration or liquidation.
Once you’re comfortable with the terms, the application process is typically quick. In many cases, funds can be approved and released within a few working days.
To apply, you’ll usually need to provide:
- The last 6 months of business bank statements
- Company accounts
- Personal details of the director
Pros of unsecured loans
- No security is needed, so they can be more accessible for small businesses
- There’s no risk of losing valuable property if you default on your loan
- The application process is quicker and easier than for secured loans
- Repayment can be flexible with no early repayment costs
Cons of unsecured loans
- Interest rates are typically higher than those of secured loans
- Loan amounts available are lower due to the increased risk to the lender
- Eligibility is stricter as the lender needs to be confident you can repay
- Most unsecured loan lenders will ask for a personal guarantee
Differences between the secured and unsecured loans
Understanding how secured and unsecured loans differ can help you determine the right option for you. Here’s a breakdown of the key differences between the two:
- Collateral: Secured loans require a UK property as security. Unsecured loans don’t, and approval is based on your business’s financial health and often includes a personal guarantee instead.
- Interest rates: Secured loans usually offer lower interest rates because the lender’s risk is reduced by the asset backing the loan. Unsecured loans often come with higher rates due to increased risk.
- Loan terms: Secured loans can be repaid over a longer period of up to 15 years, helping lower monthly costs. Unsecured loans have shorter terms, often between 1 and 5 years.
- Loan amounts: You can typically borrow more with a secured loan, up to £2 million, but the amount will depend on the value of the collateral. Unsecured loans are lower and range from £10,000 to £500,000.
- Application: Secured loan applications are more complex and can take longer due to valuations and legal checks. Unsecured loans have a faster, simpler process with fewer steps and quicker decisions.
Secured vs unsecured business loans: Which is best for you?
Secured and unsecured loans can both support business growth, but it’s essential to understand the terms of each and how they could affect your finances.
Here are a few things to consider when choosing the right business loan:
1. Are you willing to offer a UK property as security?
This is a key factor when deciding which loan suits you and your business best. If you’re happy to secure the loan against a UK property, a secured loan may offer lower rates due to the reduced risk for the lender.
However, an unsecured loan may be a better option if you’re uncomfortable putting your property at risk or don’t own a suitable property.
2. How quickly do you require the funds?
Timing can be a critical factor when choosing between secured and unsecured finance. If you need fast access to funding, an unsecured loan may be a better option. The application is typically streamlined, and in some cases, you can receive funds within 48 hours of applying.
Secured loans, on the other hand, can take much longer to complete. Due to potential legal checks, property valuations, and additional paperwork, the process can take up to eight weeks.
3. Is flexibility or cost more important?
Although secured business loans are typically cheaper than unsecured ones, they usually have much less flexibility. Unsecured business loans allow you to settle early without paying a penalty and make overpayments towards your loan to reduce monthly commitments.
A secured loan typically has lock-in periods and early settlement fees, so it is worth opting for unsecured finance if you want the flexibility to repay early.
4. How much do you need to borrow?
Consider how much your business can borrow. If you’re looking to borrow a larger amount, a secured loan may be a better option. Lenders are generally willing to offer higher limits when the loan is backed by property.
Because of the increased risk, unsecured loans are typically capped at lower amounts. So, if you only need a smaller loan or don’t have security to offer, an unsecured option may be more suitable.
Unsecured and secured loans at Aurora Capital
Secured and unsecured business loans both have their benefits, so if you’re still unsure, speak to one of our experts to understand which option works best for your business.
At Aurora Capital, we offer a range of business finance solutions. If you’re interested in seeing what other funding options are available for your business, contact our friendly team today, and we’ll get you on the right track.
