Secured vs. Unsecured Loans: What You Need to Know
When making a decision around business finance, deciding on the type of loan is important. There are two types of loans that an owner needs to consider for financing their business: secured and unsecured.
Secured loans and unsecured loans can be used to spend on expanding areas of your business. Whether that’s upgrading equipment or hiring new employees, the type of loan you use will enable you to free up working capital that can be used elsewhere.
Those loans have their place for business owners to borrow money that they need. However, secured and unsecured loans have their own pros and cons that are worth thinking about.
What is a secured loan?
A secured loan is a loan that is secured by assets. Items that are considered valuable to the business could be office space, company cars or essential equipment such as servers or kitchen utensils.
For the lender, there is less risk with offering a secured loan. At White Oak, we have an asset finance product available to you that will help you decide on the appropriate assets you want to use to get a secured loan for your business.
Some examples of getting a secured loan might include:
A business looking to find funding to buy a company that’s competing with them in their industry or sector
Company director who uses their private property to secure a loan for their business
Invoice finance, which is related to the value of invoices your business has raised
Pros of using a secured loan
Secured loans can be a useful tool for business owners. With a secured loan, the lender will use the value of the asset(s) your business owns as a form of security against the amount you borrow.
Secured loans have lower interest rates than an unsecured loan
The design of a secured loan means that by offering assets as security, repayment rates are cheaper. This means that the risk of lenders losing money is reduced as they have a secondary repayment source.
Good for borrowers with poor credit history
If you have a poor credit history, then it makes it hard to access funding that can grow your business. One of the positives of applying for a secured loan as a business owner is that it’s great for businesses and startups with an imperfect credit history to access funding.
Longer monthly repayment periods to repay the loan back
Unlike an unsecured loan, the repayment terms on a secured loan can be paid back over a longer period of time. This is dependent on the agreement between you and the lender so if you have a long loan repayment term, the monthly payments will be lower, easing pressure on your business’ cash flow.
Cons of using a secured loan
While secured loans have many benefits, there are some things that business owners need to think about before taking out a secured loan.
Loan is slow to obtain
Accessing funding can take a long time to obtain. The lender will have to complete all the due diligence processes that come with approving a secured loan, which can take weeks to get the amount you want.
You may have to pay upfront for the loan
One issue that comes with a secured loan is paying money upfront to access the funding as applying for a secured loan is similar to getting a mortgage. That may include paying upfront for valuation and legal fees if the lender puts a legal charge on your property.
Owner may lose their assets if they fail to repay loan
If you find yourself in the situation that you are unable to repay your loan to the lender, then you may lose the assets that you used to obtain a secured loan. You could lose your home or essential equipment as the lender can sell the asset(s) to claim back the cost of the loan.
What is an unsecured loan?
Unlike a secured loan, an unsecured loan is not backed up with assets. It’s riskier for a lender to lend the total amount with an unsecured loan to the business owner as there is no guarantee that they will get their money back.
Rather than loaning thousands of pounds, an unsecured loan involves loaning smaller amounts of money. The loan is more focused on the credit score, trading history and strength of the business than the assets the business owns.
Some examples of getting an unsecured loan may include:
Working capital finance
Short-term cash flow loans
Merchant cash advances
Pros of using a unsecured loan
While secured loans have their place for accessing funding, an unsecured loan is just as good when it comes to financing and growing your business.
Easier to obtain than a secured loan
The process behind getting an unsecured loan is faster and easier than a secured loan. Lenders who offer an unsecured loan to lower do not have to go through due diligence processes as they control the process behind giving out an unsecured loan to your business.
You can loan smaller amounts for your business
Unsecured loans make it easier to borrow small amounts of money for your business. In the UK, most unsecured lenders will offer you anything from £1,000 to £500,000, meaning that you can loan a decent amount to help your business grow.
Repayment periods are flexible for unsecured loans
The benefit of using an unsecured loan is the flexibility to repay back the amount you borrow. You could borrow small amounts of money and pay it back quickly without being tied into a long-term monthly repayment contract.
Cons of using an unsecured loan
While unsecured loans can be a good way to access funding, there are issues that need to be taken into account as a business owner when using this type of loan.
Unsecured loans are hard to access
An unsecured loan can be difficult to access for a business owner. Without collateral, the lender is reliant on your business plan, cash flow and other documents that will play a factor in whether they accept or decline your unsecured loan application.
High interest rates to repay loan
One of the issues with an unsecured loan is high interest rates. An unsecured loan carries more risk than a secured loan because if you happen to default on your loan repayments, the lender will blacklist you and the result being a poor credit rating.
Owner needs good credit score to secure loan
Having a good credit score can make the difference between having your unsecured loan application accepted or rejected by the lender. Getting an unsecured loan with an average credit score is not impossible, but as you are not using collateral, the business owner’s credit score is the only form of security the lender has.
What is the difference between secured and unsecured loans?
With a secured loan, the risk is on the borrower to repay the loan in the form of assets that the business owns. Whereas, an unsecured loan is riskier for the lender as it comes with uncertainty of not getting their money back if you are unable to repay the loan.
Secured and unsecured loans have their place for business owners being able to access funding for their business.
At White Oak, we have business development loans that are flexible to the needs of your business. You can borrow from a minimum of £25,000 up to £2 million for your business.
If you want to know more about how we can help you, then contact White Oak’s finance expert and we can discuss the type of loan that suits your business.