Secured vs unsecured business loans

Adam Parker explains the difference between loan types to help you decide which one is best for your small business.

You’re a business owner with a financing problem. You know what you want for your business, but you lack the finances to make it possible. Sound familiar? Don’t worry, as it turns out, thousands of entrepreneurs across the UK are faced with the very same problem.

By this stage you have probably started investigating the various financing options out there. Two types of loans would have undoubtedly stood out to you: unsecured business loans and secured business loans. Both probably seem alluring, but which one is the right choice for your business and of course, your future? The best way to determine this is to compare the two types of loans and to truly scrutinise the pros and cons attached to each.

What is an unsecured business loan?

An unsecured business loan is particularly attractive to entrepreneurs with no credit history or a less than perfect credit score. It is a loan provided to a business with no collateral attached. The lender takes on the risk that the customer may default on the loan.

Pros of an unsecured business loan

An unsecured business loan is quick and simple to apply for. Most lenders offering an unsecured loan will be more interested in your current relationship with money than your historical one. If your business idea seems viable and you can prove that you can afford the monthly repayments, you are well on your way to a signed and sealed loan deal.

Another great pro is that you can typically pay off this loan amount in a short period of time. You won’t be tied into a long-term contract. That doesn’t mean that you won’t be able to loan a decent amount of cash. In fact, most unsecured lenders in the UK will offer you anything between £1,000 and £500,000. The criteria for an unsecured business loan are so simple that they in themselves are a massive pro. To qualify for an unsecured loan, your business needs to have been registered within the UK for six months, having some sort of turnover to prove (£5,000 per month should do it), and of course, applicants must be over 18 years of age.

Just because unsecured business loans are so simple to grasp and apply for, it doesn’t mean that there are no cons attached to them.

Cons of unsecured business loans

One of the biggest cons is that defaulting on your loan repayments will result in you being blacklisted and suffering a poor credit rating. Another con to be aware of is the interest. Unsecured loans, because of the risk involved, come with higher interest rates than high street bank loans or secured business loans. Of course, if you are unable to get a loan from the bank or other institutions because of your credit rating, this might seem like a small price to pay … pardon the pun.

What is a secured business loan?

A secured business loan is one made to a business on condition of collateral or a co-signatory who will take on the financial responsibility if the applicant defaults on repayments. New start-ups often go this route because it ensures that they get the cash advance that they need, with a comparatively low interest rate. Of course, not everyone gets approved for this type of loan.

Pros of a secured business loan

One of the most alluring pros of a secured business loan for an entrepreneur is that larger loan amounts are available. If you need a hefty amount, this might be the route for you. The repayment terms are also considerably longer. In some instances, you can repay your loan over seven years. For some, this is a perk and for others the idea of being tied into a long-term contract is unnerving. While these loans are great for businesses that have a less than admirable credit score, because of the security (collateral), the interest rates are kept quite low.

Cons of secured business loans

There are a few cons to be thought about when applying for secured business loans. First, you will need to have collateral or be able to convince someone to sign surety on the loan. This can be hard work. Also, you will need to face the fact that you will be tied into a lengthy contract, with no way out. With these types of loans, there is usually a lot of paperwork involved and some red tape too. You certainly won’t be walking away with your loan paid out within 24 hours. It can take days or weeks to get a secured loan approved and processed.

Adam Parker is commercial director of credit broker SME Loans

Further reading on business loans

> Getting a short-term unsecured loan as a small business

 

Related Topics

Business Bank Accounts

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