Money is a big issue for business. It’s what keeps the wheels turning, and what ultimately keeps everyone coming to work every day. But sometimes your business might need a little bit of a cash boost in order to grow, and for that you need finance. There are a lot of different finance options available for businesses, depending on your size, what you do and what you want the finance for. But 2 of the most popular are secured and unsecured business loans, which are a more general type of finance. Today, we want to go into what the differences are between the two, and help you understand which option might be best for your business.
What Are Secured Business Loans?
A secured business loan is a type of debt finance, and is available to most businesses. They work by the lender offering you a sun of money to borrow, which you then pay back with interest over an agreed term or time period. The ‘secured’ part comes in because the business owner must offer something as security (or collateral) against the value of the loan. This is done so that, in case the business can’t repay the loan, the lender can take the asset used as security as a way of recouping any outstanding debt. Think of it as a bit like a mortgage – the house is collateral for the loan amount, and if you don’t keep up the payments, the house is taken back.
Who Are They Good For?
Secured business loans are an attractive option for a lot of business owners, as they often comes with lower interest rates and longer terms. This is because the security makes them less risky for the lender, so they are willing to offer better deals. If your business owners property or other valuable assets like vehicles or equipment, then a secured loan might be a great option for you. They are also useful if you want to borrow larger amount of capital, as secured loans often go higher in value than unsecured ones. And finally, if you have any form of blemish on your company credit score, the collateral can be used to offset the risk, so you are more likely to be approved for the loan.
What About Unsecured Business Loans?
Unsecured business loans work in a similar way, but there are some key differences. The main one being that you don’t have to put up any security or collateral against the loan. Instead, lenders usually ask for a personal guarantee, which is a written promise from a company director to pay off the loan themselves if the business is unable to keep up with payments. However, this does come with some downsides. Unsecured business loans are much riskier for the lender, so you will find they have much shorter repayment terms and higher interest rates than secured loans. This means you could end up paying more overall to offset that risk for the lender.
Who Are They Good For?
Unlike secured loans, unsecured loans are a viable option for pretty much any business that needs capital, even if they don’t have anything to offer as collateral for the loan. Because you don’t need any high-value assets, even start-ups can apply for unsecured loans. This kind of loan can be underwritten and funded much quicker than a secured loan, so are a good option if you need money quickly. They are also much easier to pay back early (if you’re in a position to do that), as they generally have much lower early repayment penalties. When looking at your eligibility, the lender will assess your trading history and your company credit report, so that they can assess the health of your business and the risk to them if they approve you. So the younger the business is, the higher the interest rate you’re likely to get.
Choosing A Loan Type
So, how do you choose a loan type? Part of that will be down to whether or not you have assets you could put up as collateral. This is often the defining factor for businesses, but it’s not the only one. Generally if you’re a limited company or an LLP registered in the UK (and you have a decent credit score), then you shouldn’t have any problems applying for and accessing secured and unsecured loans through traditional lenders and alternative finance providers. So the decision is likely to come down to the size of the loan you want.
If you’re a sole trader, the story might be a bit different. While you can apply for both secured and unsecured loans, the minimum loan amount may be quite high, and if you don’t have the assets for a secured loan then you may be limited. The important thing to remember is that no matter which product you go with, always carefully check the interest rates and terms of the business loan, and compare them to your other options. And 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.
At Cove Accountancy Services, we are here to help you with all things finance for your business. As well as managing your accounts, VAT and payroll, we can give advice on whether you should apply for finance, and which might be the best options for you. To discuss your options, just get in touch with the team today.