When opting to take out a business loan, understanding the types of loans available to you is the best starting point for working out which is best for your business. Whether you’re looking for finance for new business premises or a cash injection to see you through tougher financial periods, there are two base loan types – secured and unsecured – which work very differently from one another and offer different benefits.
Secured loans offer the borrower the chance to borrow the money they need, typically larger sums of money, in return for a form of security often referred to as collateral. This could be your personal residence, your business’s property, internal assets such as equipment or vehicles or anything of monetary worth equivalent to your loan. These securities ensure that the bank or lender has something in place that they can take in the case that you are unable to repay your loan.
On the other end of the scale, we have unsecured loans – as the name suggests, these loans aren’t secured against anything and instead rely on your credit history and the results of affordability checks. The only way the lender is able to get the money back is through regular repayments, or by taking legal action and are therefore typically only available as smaller loan amounts.
At their base, these loans are clearly different in terms of security, but just how deep do the further differences go? You may be surprised to know that interest rates, risk levels and even the amount you can borrow can all be affected by the presence or absence of security:
Due to the lack of security in place to provide peace of mind for the lender, the interest rates on unsecured loans tend to be much higher than on secured loans. By opting for a secured loan, you may be able to access much more agreeable interest rates; however, these do tend to be over a longer period of time. Unsecured loans are typically shorter loans and so despite these higher interest rates, aren’t necessarily going to prove more expensive if paid off on time. This may differ from lender to lender, however, so it’s best to take care and do a thorough comparison.
When it comes to risk, unsecured and secured loans distribute the risk involved differently. Unsecured loans put higher risk levels in the hands of the lender due to a lack of security in place to cover the loan amount. While the risk is lower for the borrower, this can equate to higher monetary penalties if a court case is successful. However, with secured loans, the risk is considerably lower for lenders and is instead put into the hands of the borrower. If they are unable to meet repayments, then they are at risk of having their security asset taken away.
As a result of the above points, the amount that can be taken out with either option is ultimately affected. Due to the higher risk levels for lenders, unsecured loans are typically only available in smaller amounts of up to £3,000 or so depending on the loan type and your lender. Secured loans more typically see amounts ranging from £10,000 and above depending on your lender and loan type and will have longer repayment periods.
The Benefits Of Secured Business Loans
Secured loans often come in the form of commercial mortgages, vehicle loans, bridging finance, invoice financing and inventory finance, as these often come secured against some form of business or personal asset, usually that which the loan is being used to purchase or invest in.
These loans present a reduced risk for the lender and while this does mean a higher risk for the borrower, it often comes alongside lower interest rates and more agreeable criteria. Whenever you take out a loan, you will be subject to credit checks and debt-to-income ratio requirements but due to these low-risk levels, secured loans are often easier to access for this reason.
Secured loans also offer the opportunity to take out loans for a longer period of time, which is ideal for larger loan amounts or those looking to make long-term investments. While this does require some level of commitment in terms of repayments, this does offer greater flexibility and for small businesses looking to grow and expand, it could be an ideal solution. You can also put up personal assets as collateral in order to secure the funding you need, often of substantial amounts of £3,000 and above.
The Benefits Of Unsecured Business Loans
If you are unable to offer collateral, uncomfortable with putting up security or you simply need a smaller amount, an unsecured business loan can be a suitable alternative in most cases. These can often come in the form of a basic unsecured business loan, working capital loans and a number of other financial products.
Perhaps the biggest benefit for businesses, particularly SMEs just finding their feet, is that the lender carries most of the risk with an unsecured business loan. This way, the borrower is protected against losing any assets that may have put up for collateral with a secured loan. Instead, only your credit history and affordability checks will be taken into account and if using a guarantor (where possible), their credit history will likely be checked instead.
For this reason, the application for an unsecured business loan also tends to be a much more streamlined and rapid process. For businesses in need of money quickly, this can often mean that you’ll be able to access the funds you need in just a few days or so, dependent on your lender of choice.