Secured loans and unsecured business loans – what's the difference?

'Which business loan is for me?' is something most owners have asked. To help you decide, here are the main differences between the two main types – secured and unsecured business loans.

There are many ways to fund a new business and raise money as it grows. A small business loan can be essential in helping you make those crucial next steps, but navigating all the different options can feel daunting. Whether it’s for staff wages, upgrading the cafe coffee machine or taking those first steps to getting a business off the ground, we’ve broken down the main differences between a secured and an unsecured business loan.

What is a secured business loan?

Funding providers have different requirements when you apply for a secured business loan. Most will review the following factors before making a decision:

Collateral: this provides loan providers with a form of security and can be anything of value that your business owns - such as property, equipment, or other assets.

Financial statements: loan providers will want to ensure that your business can afford to make monthly repayments on the investment and are likely to ask for your financial statements.

Business credit score: lenders will take your business credit score into account when making a decision. Find out how you can improve your business credit score.

Trading history: secured business loans are typically available to businesses that have been in operation for at least two years.

Personal credit history: you may also be asked to provide information about your personal credit history to support the application.

Differences between secured and unsecured loans

Applying for a secured or unsecured business loan will depend on several factors such as your business history, asset value, and funding needs. We cover the difference between secured and unsecured business loans in detail here, but a quick overview is:

Secured business loans: require collateral against the loan and often have lower interest rates since the funding provider takes on less risk.

Unsecured business loans: do not require collateral, meaning that the lender can’t sell your assets if something goes wrong - while often coming with a more speedy and simple application process.

Our Flexi-Loan is an unsecured business loan that is designed specifically for small businesses, with no early repayments and top-ups available if you need additional funds.

What is an unsecured business loan?

With an unsecured business loans, the loan isn't set against assets as collateral meaning there typically isn’t such a level of legal security for a lender. This means the risk or exposure for them is much higher.

Providers of unsecured loans tend to mitigate this risk by lending business loans in smaller amounts over shorter periods of time. A seasonal business – such as a B&B with a focus on summer tourism – might seek an unsecured loan to cover gaps in their working capital (such as staff wages) in months when business is slow, knowing they can pay it back once things pick up in summer.

In most cases you'll need to provide a personal guarantee when taking out an unsecured loan. A lender will often offer an amount based on the business’ turnover, estimating the future success of the business based on its past performance.

Generally, it's also common for them provide a legal loan document, explains Shambrook. “This will typically say how much has been lent, what the interest is to be paid, the instalments of repayments, and the terms if they default,” he says. Sometimes these loan documents will take the form of a debenture.

Benefits of an unsecured business loan

  • Having what is known as “free assets”, which have not been borrowed against, means the business can sell them as they please without seeking permission.
  • There tends to be fewer up front costs for unsecured loans in the absence of legal and valuation costs.
  • An unsecured loan is a good option for a relatively new business that does not yet have assets to offer as security and need more flexibility in the time it takes to repay them.

Drawbacks of an unsecured business loan

  • Unsecured loans carry more risk for the lender and therefore tend to have higher interest rates.
  • Many lenders will have a lower cap on the amount they loan to a business without security.
  • If a trading position of a business isn’t strong it can be more difficult to get funding through an unsecured loan.

Do iwoca offer business loans?

In addition to our Flexi-Loan and Revenue based loan we're an accredited lender for the Recovery Loan Scheme (RLS) , and are offering loans of up to £750,000 through this government scheme.

Use our business loan calculator to get a better idea of whether this could be the right funding option for your business.

More on business loans

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Bonnie Christian is writer and digital news reporter who’s written for publications such as The London Evening Standard, WIRED, and ABC News. Based in London, she writes on topics such as the environment, politics and technology.

Article updated on: 15 June 2022

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