According to the BBC, 1.2 million people are now taking out loans every year. When it comes to looking for a commercial finance, the first question put to business owners is whether they’re looking for secured or unsecured business loan. Secured and unsecured loans are very different products, which means it’s important to know which one is right for your business.
As a commercial finance broker, Think Business Loans understands the confusion that many businesses face when looking for the right financial product. With this in mind, our team discusses the difference between secured and unsecured business loans so you can decide which product is right for you.
Secured vs unsecured business loans
So, what are the differences between a secured and unsecured loan? A secured loan is one where the debt is linked to your property and is only available to homeowners. The amount you can borrow will solely depend in the amount of free equity you have in your property – meaning the less mortgage you have to pay off, the more you can borrow.
Unsecured business loans are available to those without equity and a homeowner status. These usually requires a personal guarantee from the lender, who will only grant a loan based on the financial health of a business.
Pros of unsecured business loans
- Straight-forward application process - Unsecured loan applications are much more straightforward as asset valuations are not necessary. As a result, much of the work can now be completed online.
- No collateral - Unlike secured loans, unsecured loans don’t require collateral. Instead, applicants only need a personal guarantee that they will payback what they owe.
- Flexible funding option - Unsecured business loans are a great flexible funding option for SME’s. Most borrowers can make fixed repayments between one to five years, depending on their personal circumstances.
Cons of unsecured business loans
- Limited deals - Those with a lower credit rating will struggle to find a good deal, with many competitive rates only open to those with high credit scores.
- Higher interest rates - Interest rates on smaller or bigger sums of money can prove expensive. Unsecured loan rates are usually competitive between £7,000 and £25,000.
Pros of secured business loans
- Better option for homeowners - For businesses owners that own are homeowners, a secured loan can be a better option than applying for a personal loan. These are available for much larger amounts and can be a great way to inject some much-needed cash into a business.
- Easier to qualify for - If you have a less-than-perfect credit history, it can be far easier to apply for a secured business loan than a personal loan. This is due to using your property as collateral. That way, if you default on your loan, the lender can reclaim your property to cover the amount you owe.
- Easy to manage - Secured business loans can also have longer repayment periods, which means its easier to manage your finances.
Cons of secured business loans
- Repossession - Failure to keep up on your payments can result in you losing your home.
- Penalties - Before you sign on the dotted line, its vital to check the terms and conditions for fees and charges. Failure to check for things such as early repayment fees can increase the cost of borrowing.
At Think Business Loans, we specialise in providing both secured and unsecured business loans to SME’s across the country. If you would like more information about applying for finance, get in touch with our lending managers today.
Jessica Court graduated from the University of Portsmouth in 2017 with a bachelor’s degree in Media Studies. She has previously worked within the In... Explore Author