Secured and Unsecured Business Loan FAQs

It’s important to know the distinctions and implications of a secured and an unsecured business loan before you choose one. This will help you make smart choices when looking for financing. To help you compare these two types of loans, here are some common questions:

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

The main difference is that secured loans need a security asset like real estate, equipment, or invoices. This security keeps the lender safe if the borrower doesn’t pay. Unsecured loans don’t need any security; they just look at the borrower’s credit score and past cash flow.

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

When you borrow money with a secured loan, the interest rate is usually lower than when you borrow money with an unsecured loan. This is because the security lowers the lender’s risk by giving them something to sell and recover if the borrower doesn’t pay.

3. Which loan is typically approved faster?

Unsecured loans usually get approved faster than secured loans. The application process can be shorter and easier because they don’t need an appraisal of security. It may take longer to get a secured loan because the security needs to be looked at and valued.

4. Which loan type offers higher borrowing amounts?

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

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

When someone takes out a secured loan, they must own valuable assets that they can use as security for the loan. Meanwhile, the director’s credit score and the revenue through the business bank account are the main factors that determine whether or not they can get an unsecured loan. It’s important to remember that the requirements for both types of loans will be different depending on the lender. Banks and other traditional lenders will have stricter rules, while non-bank lenders will have more relaxed criteria.

6. How do preparation and documentation requirements differ?

When you take out a secured loan, you may need to provide a lot of paperwork about the asset you’re using as security, such as proof of ownership, valuation reports, and proof of insurance. Unsecured loans are based on a read-only view of business bank account statements and an 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?

Think about how fast you need the money, how much you want to borrow, and if you have security to offer. An unsecured loan might be better for you if you need funds quickly and don’t want to use security. 

A secured loan might be a better choice if you need a bigger amount of money at a lower interest rate. If you’re buying a big business asset like a commercial property, cars, or machines, a secured loan is usually the best option.

9. Which loan type generally has longer repayment terms?

Secured loans often offer longer repayment terms because of 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?

Both secured and unsecured loans can come with establishment fees, which can vary a lot 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 get 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?

Most secured and unsecured loans let you use the funds for many different business needs, such as working capital, expansion, buying equipment, or stocking up on inventory. 

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

Lenders often require personal guarantees for most types of loans to reduce 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?

Businesses with fluctuating income may want to look into secured loans because they usually have lower interest rates and longer repayment terms, which means lower monthly payments. But borrowers need to be very careful with their finances and make sure they stick to their budget; otherwise, they could lose their business assets.

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

Yes, it 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 own a lot of physical assets, like farms, factories, or construction sites, use secured loans more often. Most industries use unsecured loans.