Secured loans are a popular financing option for businesses, offering a way to access capital by using valuable assets as collateral. Unlike unsecured loans, which rely solely on the borrower’s creditworthiness, secured loans lower the lender’s risk and often come with more favourable terms, such as lower interest rates and longer repayment periods. However, they carry risks, such as the potential loss of assets if the loan is not repaid. This article explores the features, benefits and drawbacks of secured loans, along with a comparison to unsecured loans, helping businesses understand which option may be best suited to their needs.
What is a Secured Loan?
A secured loan is backed by assets. These assets can include office space, company vehicles, or essential equipment like servers or kitchen utensils.
At White Oak UK, our asset finance product helps you determine the right assets to secure a loan for your business.
Examples of Secured Loans:
- Funding to acquire a competing company
- A company director using personal property to secure a loan
- Invoice finance based on the value of outstanding invoices
Pros of Secured Loans:
- Lower Interest Rates: Secured loans typically have lower interest rates compared to unsecured loans.
- Lower Repayment Costs: Assets used as security mean repayment rates are cheaper, reducing lender risk.
- Beneficial for Poor Credit Histories: They are accessible for businesses with imperfect credit histories.
- Longer Repayment Periods: Secured loans often offer longer repayment terms, which can lower monthly payments and ease cash flow.
- Larger Loan Amounts: Secured loans generally allow businesses to borrow larger sums, as they are backed by assets like property, equipment or vehicles.
Cons of Secured Loans:
- Slow Access to Funds: Obtaining a secured loan can take weeks due to the necessary due diligence.
- Upfront Costs: You may need to pay for valuation and legal fees upfront.
- Risk of Losing Assets: Failure to repay the loan could result in losing the assets used as security.
What is an Unsecured Loan?
An unsecured loan is not backed by assets, making it riskier for lenders. They focus on the borrower’s credit score, trading history, and business strength rather than assets.
Examples of Unsecured Loans:
- Working capital finance
- Short-term cash flow loans
- Merchant cash advances
Pros of Unsecured Loans:
- Faster Access: The process is quicker and simpler than for secured loans.
- Smaller Loan Amounts: Easy to borrow smaller sums, typically ranging from £1,000 to £500,000.
- Flexible Repayments: You can repay the loan quickly without long-term commitments.
Cons of Unsecured Loans:
- Difficult to Obtain: Without collateral, approval depends on your business plan and financial documents.
- Higher Interest Rates: Higher risk for lenders often means higher interest rates.
- Credit Score Dependency: A good credit score is crucial, as it is the only security for the lender.
Difference Between Secured and Unsecured Loans
- Collateral and Risk: Secured loans require business assets as collateral, which reduces the lender’s risk. In contrast, unsecured loans do not require collateral, placing more risk on the lender.
- Application Process: Secured loans typically take longer to process due to the need for asset valuation and collateral verification, often causing delays of several weeks. Unsecured loans, however, have a quicker application process, with decisions often made within an hour.
- Interest Rates and Terms: Secured loans generally come with lower interest rates and longer repayment terms, making them more affordable and helping improve cash flow. Unsecured loans, lacking collateral, usually have higher interest rates and shorter repayment terms, leading to higher monthly payments.
- Repayment Flexibility: Unsecured loans tend to offer more flexible repayment options, including no early settlement fees, allowing businesses to repay the loan faster without penalties. Secured loans may offer longer repayment periods but could include prepayment penalties or restrictions if collateral is tied to the loan.
Conclusion
Both secured and unsecured loans can be valuable for accessing business funding. If you have valuable assets and need to borrow larger amounts, a secured loan may be the right choice, offering lower interest rates and longer repayment periods. On the other hand, if you need quick access to smaller sums with greater flexibility, an unsecured loan may suit you better, though it comes with higher interest rates and stricter approval requirements. Understanding these differences and the options available can help you make the right decision for your business’s future.
At White Oak UK, we offer flexible business development loans ranging from £10,000 to £5 million. For more information, contact our finance experts to find the loan that best suits your business.
Talk to us
If you are looking to find the right finance for your business, contact us today.
Discover the right business products all in one place.
Tell us about your business.
