Secured and unsecured business loans are two different types of loan products. Both have distinct features, and both fulfil various needs. While secured loans are considered better for long-term financial requirements, unsecured loans fulfil short-term business requirements.
How do you decide which one is better?
You apply according to the money and time requirements. Technically, there can be no precise answer to which one is better. However, you can understand which one is better through a comparative study.
However, one thing is for sure: both types of business loans have their own importance. Let us know when and in which situations secured and unsecured business loans are helpful for your business.
Are the loan types available for all business types? Yes, of course. Only the type of loan is different. But there is no difference in the business types. Whether you have a new or old commercial entity, you can always apply for whatever kind you want.
Let us do a comparative study of secured and unsecured business loans.
Meaning of secured and unsecured business loans
Before we understand the uses of secured and unsecured business loans, it is important to understand their meanings.
| Secured business loans | Unsecured business loans |
| These are long-term loans with a tenure of a minimum of 5 years to a maximum of 25 years. | Unsecured business loans are short-term loans with a smaller tenure. This can span from 3 months to 3 to 5 years. |
| You need to pledge collateral to get this loan. Otherwise, the funds are provided against a property/machine, etc., you are buying. | Unsecured business loans need no collateral. In fact, you do not need a guarantor to apply for funds. |
| You pay small monthly instalments due to lower interest rates distributed over a long tenure. | The repayment amount is larger than that of secured loans. The reason is the longer duration, which results in higher interest rates. |
How do secured and unsecured business loans work?
You must be able to understand by now that secured business loans in the UK work differently than unsecured business loans. By knowing the workings of both loan types, you can decide when and where you will need to use them.
Let’s delve into this difference between the two and understand how they work to be significant to your business.
| How do secured business loans work? | How do unsecured business loans work? |
| You apply for a secured business loan with a personal guarantee or by providing collateral. The lender evaluates the value of collateral to ensure its equivalence to the loan amount. After collateral verification and other formalities, the lender approves an amount. The money gets transferred to your account once you consent through a legal loan agreement. Besides the collateral verification, the rest of the process happens online. It may take one to two weeks to get the funds. | You must apply online for these loans and submit the necessary financial details. A Bank statement of your business for the past year, credit report address proof, business registration details, etc., are important. The lender performs online verification of your application and information. If it finds your repayment capacity strong, it approves the funds. Money reaches you in a day or two. |
Pros of secured and unsecured business loans
Every loan product has its advantages. Secured and unsecured loans are beneficial for your businesses in different ways. However, the pros and cons also depend on your individual business conditions. Sometimes, despite being an established business, you may fail to get a secured loan due to poor credit. Many conditions and aspects matter.
Let’s understand how it happens.
| Pros of secured business loans | Pros of unsecured business loans |
| Lower interest rates that make repayments easy. | Instant approval decision, and you can receive funds on the same day. |
| Enjoy higher borrowing limits that fulfil multiple requirements. | No need to pledge an asset or find a guarantor. |
| Easier to qualify for the funds using collateral. | No compulsion to mention the purpose of borrowing funds. |
Cons of secured and unsecured business loans
If you want to make a rational decision about a financial product, knowing only its benefits is insufficient. However, instead of calling them cons, it is better to take them as challenges. This is because every loan product is essential for many reasons.
Let’s delve into the cons of both loan types.
| Cons of secured business loans | Cons of unsecured business loans |
| You cannot qualify for funds without collateral. | Higher interest rates make you pay a higher loan instalment. |
| If collateral does not cover 80% to 100% of the loan amount, you need to compromise on the loan amount. | In a consistently poor credit situation, the lenders may reject the loans despite the current repayment capacity. |
| Collateral evaluation takes time, thus making the process lengthy. It is impossible to borrow funds instantly. | Every factor affects the loan amount. Thus, you may not get the loan amount that fulfils your business needs. |
Which is better for your business? Secured or unsecured business loan
There can be no decided answer to this question. However, there are several specific conditions in which you can choose which one is better. By understanding the situation, you can also understand your business requirements better. Whether about secured or unsecured business loans in the UK, you should first know how and when they relate better.
Let’s find out when you will need these loans:
| Secured business loan is an option when…… | Unsecured business loan is an option when……. |
| Your business is an established one and has collateral to pledge. | You are a start-up business owner and have no assets to pledge. |
| You have a poor credit situation and cannot be eligible for a loan due to a poor rating. | You need immediate funds for an urgent situation and cannot wait for a lengthy process. |
| You need a higher loan amount at a lower interest rate. | You have strong business financials and credit scores. These factors help you borrow bigger at a low rate without collateral. |
Conclusion
With the above comparison, you can understand that both secured and unsecured business loans are significant. You may need any of them depending on the business requirement.
Here are some conclusions comparing the two business loan types above:
- Secured business loans and unsecured business loans have entirely different purposes and features. You cannot really decide which one is better.
- Both the loan types are available democratically for new as well as established businesses. You just need to be able to qualify for the eligibility criteria.
- Always apply for a loan amount that you can actually pay off. Proving repayment capacity during application is easier. However, staying committed to repayments can be difficult sometimes.
Harry Kane is a financial writer and author who has covered wide topics related to business loans and finance for the last decade. He has been working as the Chief Contributor in finding out deals on various business finance products covered by Thebusinessfunds, a reputed business loan broker firm in the UK. The primary work of Harry is to analyse the loan requirements of various businesses according to their circumstances and affordability. He directly communicates with the loan aspirants and guides them to get the right loan matching their needs. He has a vast experience in finance writing, working with many major business firms in the UK. At Thebusinessfunds, Harry also used to write well-researched blogs covering the financial problems of business loan aspirants and providing relevant solutions. He is a postgraduate with MSc. in Banking and Finance.
