When it comes to choosing the most suitable type of business loan for your business, it can seem as if there are countless options to choose from. A common question that people ask is- what is the difference between a secured business loan, and an unsecured business loan? It’s always important to take out the best type of business loan for your individual circumstances and requirements, so we’ve explained the difference between the two to help you decide which type of business loan best suits your needs.
Firstly, what is a business loan?
A business loan is a sum of money issued to a business owner exclusively for use in their business and is repaid—with interest—over a set period. When it comes to the amount that you can borrow, a business loan can range from £1,000 up to several million pounds.
If you’re looking to grow your current business, a business loan can be a good solution to explore. A business loan can be beneficial to a business in many ways, allowing you to boost your cash flow and take advantage of new opportunities.
What is a secured business loan
A secured business loan offered against collateral, which is provided as comfort/security to the lender. The collateral you use to secure your loan against can be in the form of a variety of assets, such as equipment or property.
Because this type of loan is secured, it poses less risk to the lender, which means lenders are often able to offer lower interest rates and better repayment terms. However, the assets used to secure the loan may be repossessed if repayments aren’t made in line with the agreement.
Is a secured business loan the right option for me?
If your business is asset-heavy and has a demonstrable trading history, a secured business loan may be a preferable option. Secured business loans require a business owner to provide assets such as property or machinery as security.
Secured business loans are often cheaper and more accessible than unsecured loans, and early repayment is possible. Furthermore, business owners who decide to go for a secured loan will usually not need to provide a personal guarantee.
What is an unsecured business loan?
An unsecured business loan doesn’t require any security (i.e. an asset being used as collateral). This is the key difference between a secured and unsecured business loan. When an unsecured business loan is offered, it is based on financial integrity, business track record and a risk assessment. This often means a decision is made faster, as there is no need to provide assets and have them assessed.
Is an unsecured business loan the right option for me?
An unsecured business loan can be a good option for growing businesses, who do not have a large number of assets on their balance sheet but do have a reasonable credit score.
Unsecured business loans are the preferable option for asset-light businesses, as you won’t need to offer any security (an asset to secure your loan).
Unsecured loans are more straightforward than secured loans, and can be a faster option when it comes to getting funding. However, it’s worth noting that lenders of unsecured loans will almost always ask for a personal guarantee.
Business loans: How PMD can help
Facilities can be agreed within hours at competitive rates. Other than director’s guarantees, normally no additional security is required. Paperwork is simple to complete and the money can be in your account within days. Our panel of funders are independent providers of finance and their facilities will not impact on your current bank facilities.
If you are considering applying for a business loan and are still unsure about which option is the right one for you, PMD are here to help. We pride ourselves on offering more than finance- advice and ideas are the lifeblood of our business. Our experienced advisors can chat to you about the pros and cons of secured and unsecured business loans and help you decide which is the best fit for your business and requirements.