Secured vs Unsecured Business Loans

Unsecured loans are those that are not secured against personal or business assets.  This type of finance is a great way to increase cash flow without using company assets as collateral.

Unsecured loans are generally available over terms from 3 months to 5 years depending on the purpose of the business loan.

With unsecured loan applications, lenders focus their underwriting decisions based on personal & business credit ratings, business bank accounts and business financial reports to calculate your eligibility and maximum borrowing amounts.  In most cases a personal guarantee is required to secure the finance.

Luckily, there are a range of personal guarantee insurance products available for businesses using unsecured finance.

Deciding which type of loan best suits your circumstances depends on number of things.

You need to consider;

• Credit scores - When applying for a business loan, lenders will look at credit scores to help assess whether you are suitable for a loan and will gauge this on how low or high your score is. Credit scores are an indication of how you manage your credit agreements and whether you can afford more credit.
• Financial stability - Lenders look at how stable your company finances are to assess whether you are eligible for a loan using your financial forecasts, profit and loss and business bank account statements to determine the risk of the application.

As the loan is unsecured, the lender will find it difficult to recoup any monies in the case of a default,, hence the requirement of a PG from directors in most instances for added comfort for the lender. this also shows confidence from the directors in their business.

If your business is financially stable, then unsecured borrowing may be the best route for you as lenders are more likely to approve your application.

On the other hand, if your business is not financially stable, then secured borrowing may be the best route for you as you are using collateral for the loan. The use of collateral can increase the likelihood of acceptance.

• Unsecured loans are relatively quick and easy to get. Without the need for collateral, as with secured loans, there is minimal paperwork and short processing times for applications.
• Without the use of collateral, your assets are safer in the event of default as the loan is not secured on them.
• They are generally more flexible regarding loan amounts and loans terms.
• Borrowing amounts are not restricted to the amount of equity in an asset.
• As the loan amount is not determined by equity, it can be easier to take out loans on a rolling basis and/or top up existing loan agreements.
• Obtaining an unsecured loan is usually a lot quicker given there are no charges or debentures required that can delay the pay-out time.

• Without the use of collateral, unsecured loans carry a higher risk to lenders who would struggle to recoup any money owed in the event of a default. This means borrowing amounts are determined by affordability assessments and can be lower than secured borrowing.
• Your businesses financial health and credit worthiness will have a direct impact on interest rates and the overall cost of the loan.
• Unsecured loans are not available over long terms as with secured finance, most lenders will allow a maximum term of 5 years.

Whether you qualify for an unsecured loan or not depends on a range of factors.

This is known as an affordability assessment, which lenders carry out to make sure you can afford to repay the loan without falling into financial distress.

Secured loans are secured against tangible assets such as vehicles, equipment, or property. These assets are used as collateral to secure the loan against.

Secured borrowing amounts are restricted to the amount of equity available in the asset and how much equity you can “release” depends on the asset type.

Most secured loans are secured against property and are available up to an 80% loan to value (LTV). LTV is the amount of equity you can access for the loan.

Find out more on what can be used as security.

For example, you have a commercial property worth £5,000,000 and a mortgage balance of £3,000,000 giving you £2,000,000 available equity. With lenders allowing up to 80% LTV, the maximum you could borrow is £1,600,000.

As mentioned, property is not your only option when using secured finance and a range of other assets such as vehicles and equipment can also be used.

When using these types of assets as security, lenders look at different factors than property and in some instances finance 100% of the assets current value. The key word is here is current, as these types of assets are likely to depreciate, go down in value, over time.

Lenders will carry out a valuation to determine the current value of any assets you wish to use as security, before offering a loan.

With secured loans, lenders take into direct consideration;

• The type of asset being used as security.
• The amount of equity in the asset
• Any outstanding finance on the asset

Even though the loan is secured on assets, lenders still assess the company’s financial stability, credit scores and affordability criteria.

However, there can be less emphasis on these compared to unsecured finance as security is being used, which lowers the lenders perceived risk.

When trying to determine whether you are likely to be approved you need to think about the types of assets you have available to use, their equity and any other outstanding finance secured on them.

With secured loans, lenders take into direct consideration;

• With the use of collateral, secured loans carry a lower risk to lenders, as it is easier to recoup any money owed in the event of a default. This means that interest rates tend to be lower than with unsecured loans.
• Loan amounts can be higher for borrowers with high amounts of equity available.
• Secured loans are available over longer terms, with most lenders will allowing up to 25 years.

With secured loans, lenders take into direct consideration;

• Secured finance can take longer than unsecured finance to complete, as there is more paperwork and valuations that must be carried out.
• With the use of collateral, your assets can be at risk in the event of a default, as the loan is secured on them.
• Loan amounts are determined by the amount of equity in an asset.
• Secured loans are not generally taken on a rolling basis or topped up during the loan agreements due to factors such as asset depreciation.