Need to know the difference between the two but have no idea where to start? Fear not. Read on to find out everything you need to know, the good, the bad the ugly and which one is best for you.
Secured business finance
So, let's start with secured business loans. They're usually granted by banks and use the property that you own as security against the credit sum loaned. More often than not, a person would use their home as security against the loan provided. With the loan being secured by an asset, it means the bank let you borrow an agreed amount. However, if you don't keep up with your loan repayments, you could lose your asset.
There are many advantages to opting for a secured loan and this is why they tend to be so popular with consumers.
Pros of a secured business finance
- Borrow larger amounts - Depending on the amount of equity tied up in your property, you're able to borrow more money than you would with a traditional loan.
- Longer repayment period - Due to the amount of money being loaned, you usually have a lot longer to pay the money back.
- Low-interest rates - Interest rates tend to be lower for secured loans due to it being paid back over a longer time period. This can be a real lifesaver for new businesses where every penny counts.
- Great option for people with a poorer credit history - Secured loans give people with a poorer credit history, a chance to obtain a loan. Banks are more likely to agree to this type of loan as they have the security of your property if things go wrong.
Cons of a secured business finance
- Your property is the bank's security - So it's a big factor to think about when you are making your decision. If you default on your payments then you could lose your property.
- Extra Fees - There may be admin fees that aren't initially obvious before you obtain the loan.
- Occasionally time consuming - Securing the loan can sometimes be a lengthy process due to legal requirements and property valuations being involved, so it's certainly not a same day sort of situation.
Unsecured business finance
So, let's take a look at unsecured business loans. They're pretty self-explanatory when you know what you're looking for. It's more straightforward than a secured loan because when a loan is 'unsecured' it means there is no property or collateral to secure the guarantee of the loan. This makes it less risky for the borrower and they tend to be very popular with first-time borrowers and small businesses. However, the downside is, the interest rates tend to be higher. An unsecured loan for small businesses would typically be used for covering slower/quieter off-peak trading periods and business owners can choose from business cash flow loans or working capital loans.
Pros of an unsecured business finance
- Quick and somewhat easy - They are fairly quick to obtain and get approved much more quickly than a secured loan.
- Repayment schedules are usually fairly flexible - This can be really helpful for business owners who need some breathing space before repaying.
- Great for those who already have a successful trading history - If you're already in business, it means the bank will assess against your business's trading position.
Cons of an unsecured business finance
- Can be harder to acquire - They tend to be a little bit harder to obtain if your trading position isn't so great.
- Not good for larger loan amounts - It's not the loan for you if you're looking for a huge amount to borrow. Lenders typically won't lend more than £25,000.
Essentially, what it comes down to is your business needs and the position you're in at the time of applying. Look for a loan that will not only massively help you and your business but one that you know you can pay back comfortably.
So, take your time, do your research and you'll be sure to find a business loan that's best for you.
Infographic: Secured business funding vs Unsecured business funding
