Raising capital to expand and take on new projects is a concern for many growing businesses in the UK. As such, it’s important to be aware of the different finance options available to your business.
Our article “grants, loans, and freebies” looked at the options for businesses just starting out, but if you’re over that initial hurdle you may be interested in a loan to help your business grow.
In this article we’ll take a closer look at the differences between unsecured and secured business loans, to help you decide which product may be better suited to your business.
What financial help do you need?
Firstly, you need to be clear about what you’re using the loan for, how quickly you need the loan, how much you want to borrow, how long for, and how you’re going to pay it back.
You also need to investigate who you may be able to borrow from and how much the loan will cost to ensure you get the best deal. As well as high-street banks and building societies, these days there’s a range of other lenders with different lending criteria and specialisms who you may be able to borrow from. These include challenger banks, independent lenders and smaller specialists.
Once you know what you need, you can look around for your best options.
Get yourself ready
To make the process as smooth and painless as possible, you’ll need to make sure you’re well prepared. The eligibility criteria will vary depending on the type of loan and the lender, but generally, you need to be able to show that your business is profitable and that you’ll be able to pay the loan back.
You’ll be expected to provide information such as:
- Your business turnover and profit
- Your company accounts (or Self Assessments if you’re a sole trader)
- How much you’re looking to borrow (and what percentage of your turnover this is)
- Bank statements
- Your trading history
- Your credit record and payment history
So, let’s look at two of the most common types of business lending, secured and unsecured loans.
What are secured business loans?
Secured business loans are a type of debt finance available to businesses. This means that a lender will offer you a sum of money to borrow, which you pay back with interest over an agreed term.
Secured loans will require the business owner to offer something as security or ‘collateral’ against the loan. This means that, in the case of the business not being able to repay the loan, the lender will be able to seize the asset used as security and use it to recoup the outstanding money borrowed.
What types of businesses are secured loans best suited for?
Because a lender takes a form of security against the loan, secured loans are less risky for the lender. As such, they’ll often offer lower interest rates and longer terms compared to an unsecured loan. So, if you own a property or valuable business assets such as equipment or vehicles, you may be able to apply for a secured loan and get a better rate from the lender. They’re therefore ideal for early-stage businesses that have valuable assets.
Secured loans also generally go higher in value, so are a good option if you want to borrow a larger amount of capital. You’re also more likely to get accepted for a secured loan than an unsecured loan if you have a blemish on your company credit score, as the collateral may offset the risk.
What are unsecured business loans?
Unsecured business loans are also a form of debt finance, but don’t require any security or collateral against the loan. Instead, lenders may ask for a personal guarantee, which is a written promise from a company director to pay off the loan if the business is unable to keep up with payments.
Because unsecured loans are generally riskier for the lender, they’ll typically offer unsecured loans of lower value on shorter terms with higher rates than secured loans. This means that you could pay more overall for the loan if you opted for an unsecured option.
What types of businesses are unsecured loans best suited for?
Unsecured loans are a viable option for any business that needs working capital but doesn’t have anything to offer as collateral. Because there’s no need to value assets, unsecured loans can be underwritten and funded quicker than secured loans. This makes them the ideal option for limited companies, sole traders and other small businesses who need quick access to finance. They’re usually also easier to pay off early (if you’re in a position to do so) and generally, carry lower early repayment penalties.
When assessing your business loan application for an unsecured loan, the lender will need evidence of your trading history and will take a close look at your company credit report too. This is because they need something substantial to assess the health of your business and base your affordability on. You’ll usually find that the younger your business is, the higher the risk is, and so the higher the interest rate may be for your unsecured business loan.
Tips for making a business loan application
If you’re still unsure about which loan type would best suit you, alternative finance provider Fleximize offers the following tips:
“Generally, if you’re a limited company or LLP registered in the UK, and have a decent credit score, you shouldn’t have a problem applying for and accessing secured and unsecured loans with both traditional lenders and alternative finance providers. So, it will probably come down to the size of the loan you require and the term you want to spread your repayments across.
Sole traders, or non-limited partnerships can also apply for both unsecured and secured loans with most providers, but the minimum loan amount may be around £25,000, so check the lender’s terms if you need a small amount of capital.
No matter what product you go with, always carefully check the interest rates and terms of the business loan, which you can compare against other loan products on online rate comparison tools.
Most importantly, look for a provider that offers flexibility and is willing to tailor the loan terms to suit your growing business. Perks such as repayment holidays, top-ups and support for your wider business should be accessible from good loan providers across both secured and unsecured loans.”
In this article, we’ve worked with Fleximize, a leading UK business loans specialist to take a closer look at the differences between unsecured and secured loan products, and explain which may be better suited for your business.