Secured and Unsecured Business Loan FAQs

When deciding between a secured and an unsecured business loan, it’s important to understand the differences and implications of the two. This way, you can make informed decisions when seeking financing. Here are some frequently asked questions to help you compare these two types of loans:

1. What is the main difference between secured and unsecured loans?

The primary difference is that secured loans require security (such as real estate, equipment, or invoices). This security protects the lender in the case of default. Unsecured loans do not require security, relying instead on the borrower’s credit score and historical cash flow.

2. Which type of loan typically has lower interest rates?

Secured loans usually have lower interest rates compared to unsecured loans. This is because the security reduces the lender’s risk, as they have an asset to recover and sell in case of default.

3. Which loan is typically approved faster?

Unsecured loans often have quicker approval times than secured loans. Since they do not require an appraisal of security, the application process can be shorter and less complex. Secured loans may take longer due to the need to assess and value the security.

4. Which loan type offers higher borrowing amounts?

Generally, secured loans offer higher borrowing limits. The amount you can borrow is typically based on the value of the security, allowing businesses to access more significant amounts.

5. What are the eligibility requirements for each type of loan?

For secured loans, the borrower must own valuable assets that can be pledged as security. For unsecured loans, eligibility primarily depends on the director’s credit score and revenue through the business bank account. It’s worth noting that for both types of loans, requirements will differ depending on the lender. Traditional lenders like banks will have stricter requirements, while non-bank lenders will have more relaxed criteria.

6. How do preparation and documentation requirements differ?

Secured loans can require extensive documentation related to the asset being used as security, including proof of ownership, valuation reports, and proof of insurance. Unsecured loans are assessed on a read-only view of business bank account statements and analysis of business cash flow.

7. Can I pay off either type of loan early?

All lenders will allow an early payout for both secured and unsecured loans.  However, there may be no discount in interest or savings to be made with some unsecured loans or those loans covered by fixed term. If you’re thinking of paying out your loan early, you should check how your chosen lender treats early repayments as this can make a big difference.

8. How do I decide which loan type is suitable for my business?

Consider your need for speed in funding, your ability to provide security, and how much you need to borrow. If quick access to funds is critical and you prefer not to use security, an unsecured loan could be the better choice. 

If you need a larger amount at a lower interest rate, a secured loan could be a better option. If you are purchasing a significant business asset like a commercial property, vehicles, or machinery, secured loans are generally the right choice.

9. Which loan type generally has longer repayment terms?

Secured loans often offer longer repayment terms due to the reduced risk for the lender. However, some unsecured loans can be as long as 7 years.

10. Are there any upfront costs associated with secured or unsecured loans?

Common fees to both loans are establishment fees, which can vary substantially between lenders.  Secured loans will usually have a valuation fee related to the property and second-hand assets being purchased privately.

11. Which loan type is easier for a startup to obtain?

Secured loans are generally more accessible for startups. They can obtain term loans using property as security. They can also obtain invoice finance and equipment finance.

12. Can I use loan funds for any business purpose?

Both secured and unsecured loans typically allow funds to be used for a wide range of business purposes, including working capital, expansion, equipment purchase, or inventory. 

13. Do lenders require personal guarantees for both loan types?

Lenders often require personal guarantees for most types of loans to mitigate their risk. While secured loans are backed by security, most lenders still require a personal guarantee from directors, guarantors and sometimes major shareholders. 

14. Which loan type is better if I have a fluctuating income?

Secured loans might be better for businesses with fluctuating income due to their generally lower interest rates and longer repayment terms, resulting in lower monthly payments. However, borrowers must budget and manage their finances strictly; otherwise, they may run the risk of losing their business assets.

15. Is it possible to change the asset I’m using as security for a loan?

Yes, the substitution of security is allowed by some lenders. However, changing security involves legal processes, which will require updating or rewriting the loan agreement to reflect the change.

16. Are there specific industries where one loan type is more common than the other?

Industries that have significant physical assets, such as manufacturing, agriculture, or construction, often use secured loans more frequently. Unsecured loans are used by most industries.