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Pros and Cons of Secured vs Unsecured Business Loans

Unsecured loans work the opposite way. The lender accepts the risk since they don't have collateral to claim against if their borrower falls behind.

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UK businesses can apply for a large number of bank loans, but there are two main types:

  • Secured loans
  • Unsecured loans

The key difference is that a secured loan is at the borrower's risk. Whatever asset they have offered as security is at risk of repossession if they don't repay the borrowing.

Unsecured loans work the opposite way. The lender accepts the risk since they don't have collateral to claim against if their borrower falls behind.

Here the Revolution Brokers team explains the pros and cons of both loan types to help you make informed decisions about your business borrowing.

For more information about UK business loans and how much you might be able to borrow, give us a call on 0330 304 3040 or email the Revolution office at info@revolutionbrokers.co.uk.

The following topics are covered below:

What Are Secured and Unsecured Business Loans UK?

What Examples Are There of Secured and Unsecured Business Loans?

What Are the Pros and Cons of Secured Long Term Business Loans?

How About the Pros and Cons of Unsecured Business Loans?

Getting a Business Loan - Is an Unsecured Loan the Right Option?

Is a Small Business Loan Secured or Unsecured?

Can I Apply For a Business Loan Without Security?

What Do I Need to Know to Apply for Merchant Business Loans?

What Are Secured and Unsecured Business Loans UK?

Secured loans are backed by collateral or security. Usually, that's a property, so your security might be your trading premises or business equipment for a company loan.

If you can't pay back the loan, the lender can take that asset and sell it to recoup their losses.

Unsecured loans are often an option where a business doesn't have security to offer or just wants a low-risk short-term loan with a fast application time.

Lenders will need to carry out credit checks and affordability assessments to evaluate whether they think the business can afford the repayments. Still, it's usually much quicker since they won't need to arrange any asset valuations.

Most banks offer unsecured loans, and you can find a range of products, but rates and terms vary substantially, so you should seek advice before applying.

What Examples Are There of Secured and Unsecured Business Loans?

Typically secured loans might include:

  • Mortgages - secured against the property that the loan is used to purchase.
  • Construction loans - these are development finance products leveraged against the land and the property being built.
  • Vehicle loans - a loan to purchase a vehicle secured against that asset, whether a car, van, truck or alternative piece of equipment.
  • Home equity - this is a secured loan, with your property used as collateral. That might be a second charge mortgage or another type of loan.

Unsecured loans also come in a range of product options, so you might consider:

  • Credit cards - the most common example of a short-term unsecured loan. Each transaction acts as a loan, and you can take out borrowing up to your pre-approved credit card facility.
  • Bank loans, either granted in good faith based on your credit history and previous borrowing behaviours or backed by a personal guarantee.
  • Student loans - while not available for business funding, a student loan is another example of an unsecured borrowing product.

What Are the Pros and Cons of Secured Long Term Business Loans?

Which type of loan should you go for? Let's talk about secured loans first.

Benefits include:

  • Lower interest charges than unsecured borrowing.
  • Higher borrowing capacity.
  • Longer repayment terms.

However, the drawback is that you'll need to provide security in assets or other collateral to back up your ability to repay the loan.

There is a risk that you'll lose your security asset if you don't pay the loan back.

Longer loan terms can be favourable, but equally, if you're only after a short-term borrowing product, a long-term secured loan may not be fit for your purposes.

In essence, the security you offer through a secured loan allows you to add additional benefits to your loan terms, such as reduced interest rates.

The lower the risk to the lender, the more competitive the terms against which you can take out a business loan.

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How About the Pros and Cons of Unsecured Business Loans?

Moving onto unsecured loans, and there are pros and cons here to consider.

The significant benefit is that you won't need to put up any security, and therefore don't have the inherent risk that you'll have property repossessed.

That said, having no security doesn't prevent a lender from taking you or the business to court if you default on your loan. There is still a liability and responsibility to pay back the borrowing.

Most unsecured loans are available up to lower amounts but are quicker to apply for - so they're ideal for fast financing.

Getting a Business Loan - Is an Unsecured Loan the Right Option?

The right business loan for you depends on your objectives, such as:

  • How much you want to borrow.
  • How quickly you want to pay it back.
  • Whether you have security to offer.

Unsecured loans don't carry the risk of repossession, but it remains vital to demonstrate affordability and responsible borrowing.

You can still be personally liable for an unsecured loan if you don't keep up with repayments.

Is a Small Business Loan Secured or Unsecured?

Business loans can be either secured or unsecured. If you want to borrow a small amount, an unsecured option might be the easiest to arrange.

For larger loans, you'll likely need a secured loan with a business asset as security.

The right loan is dependent on your requirements, but it's also wise to consider eligibility criteria, such as:

  • Having a poor credit history.
  • How soon you need your loan funds.
  • Whether you've been turned down for other borrowing.

If you have any adverse circumstances, it may be that a secured loan will be the only option. You might look at taking out a commercial mortgage or extending your existing business mortgage to cover the additional cash requirement.

Can I Apply For a Business Loan Without Security?

Possibly, but any lender will need to assess your credit score and decide whether they think the risk associated with the unsecured loan is a worthwhile bet.

Poor credit scores or a history of non-repayment makes it less likely that you'll be approved for an unsecured business loan.

If you don't meet the criteria, some lenders will offer to lend, but the rates won't be the most competitive, and they'll generally require a personal guarantee as an added layer of assurance.

Lenders will look at:

  • The stability of the business, including business plans, credit scores, performance, trading history and your recent filed accounts. These pieces of information build a picture of your trade and how stable the company's finances are.
  • Your cash flow and capacity to repay the debt. That means looking at how predictable your revenues are and whether you've had any periods where you would struggle to keep up with the repayments.
  • Other debts and capital investments. If you've got a relatively low-risk business without substantial obligations, you'll be a more attractive lending prospect.

Remember that every lender is different, and given the size of the unsecured business loan market, it isn't possible to list a fixed number of terms that will apply to every loan product.

The best way to find the right loan for you - whether secured or unsecured - is to seek independent advice from a whole-of-market broker who can assess your circumstances and make impartial recommendations.

What Do I Need to Know to Apply for Merchant Business Loans?

Merchant business loans are like a step between a secured and an unsecured loan.

You don't need to produce physical security, but instead, the lender secures your debt against other assets - usually debit and credit card sales or debtor balances.

In short, you can borrow up to average earnings made on your revenue, and the lender will have the assurance they'll get their cash back since this is deducted directly from merchant sales transactions until your debt is repaid.

For more information about business loans, unsecured borrowing, or merchant business loans, please give the Revolution team a call on 0330 304 3040 or email us at info@revolutionbrokers.co.uk.

As business finance experts, we'll walk you through the various options and recommend the borrowing solution we feel is the best fit for your business circumstances.

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FCA disclaimer

The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature. We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.

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