Secured vs. Unsecured Loans: A Guide for UK Business Owners

If you’re looking for a capital boost to grow your business, ease cash flow or fund key equipment, choosing the best finance method for your specific needs can be tricky, due to the range of options and providers available. Business loans are a popular choice for UK SMEs, however, some loans require assets to secure capital, while others are unsecured but may require a personal guarantee.

Explore our secured vs. unsecured loan guide for UK business owners, discussing the pros and cons, risks involved and factors to consider when judging suitability.

What is a secured business loan?

One of the most common forms of financing, a secured business loan is an agreement between a lender and borrower where assets are used to secure the funds. This reduces lender risk and enables them to claim these assets if the business defaults on repayments. If your company has various assets to use as collateral, a secured business loan is a good option to support growth plans or give you the funds to make sizable purchases.

How does a secured loan work?

Secured loans are backed by collateral, such as business equipment, vehicles, inventory, property and even accounts receivable, presenting opportunities for growth and expansion if your business is more asset-rich than cash-rich.

Secured loans are typically offered by banks and traditional lenders and require businesses to provide assets as collateral to secure the loan. This usually involves a longer application process and slower approval times than other forms of finance, and when using digital lenders. However, secured loans can often make larger sums of capital available to be repaid over a longer period. Lenders assess the value and type of collateral to help determine the potential loan amount and terms.

You’ll pay interest on the loan, with lenders usually offering a range of fixed-rate and variable-rate loan options.

Typical use cases for secured business loans

• Growth-stage businesses that want to invest in new assets, such as new machinery, systems or vehicles, or recruitment needs
• Franchises needing to kit out new premises
• Companies needing to upgrade systems, technology and infrastructure
• Expansion plans that require a large injection of capital for recruitment, planning and equipment

What happens if I default on a secured loan?

If your business runs into financial difficulties, leading to default on repayments, lenders can claim some or all of the assets used as security to make up the shortfall. If the financial issues are just temporary cash flow issues or due to unforeseen circumstances, proactive communication with your loan provider may enable you to defer payments, get a payment holiday or renegotiate terms.

What is an unsecured loan?

Simply put, an unsecured loan doesn’t require borrowers to use assets as collateral to secure the capital. These types of loans are more commonly offered by fintechs and alternative lenders, with higher risk appetites and offering shorter loan periods, which also usually means higher interest rates.

Most small business loans are unsecured, as no physical assets are required from the borrower. This means loan terms and approvals are based on factors like business performance, turnover and creditworthiness. This can significantly speed up the process. With iwoca, you can apply in a matter of minutes with same-day decisions, thanks to our smooth online process, including real-time underwriting capabilities. 

How does an unsecured loan work?

Lenders will provide successful applicants with a sum of money to be repaid in monthly instalments over an agreed period, including interest incurred.

Loan interest rates can be fixed-term or variable, and, in some cases, the interest can be paid at the end of the loan, depending on your agreement. While no assets are required, lenders may request a personal guarantee as part of applications.

Typical use cases for secured business loans

• Working capital for operational purposes
• Plugging short-term cash flow gaps
• Paying of tax bills or other pressing liabilities
• Topping up funds during seasonal fluctuations and demands
• Investing in stock, inventory, promotional activities and growth opportunities 

Can I get an unsecured loan with a poor credit history?

You may have difficulties getting an unsecured loan with a poor credit history, in particular, from banks and more traditional lending sources. However, many private lenders offer wider access to loans to new businesses or those with poorer credit, as they have a higher risk appetite, and tend to look beyond just your credit score, evaluating your business plan, revenue potential, forecasts and other criteria. 

The trade-off for getting approved for an unsecured loan is often higher interest rates and shorter terms. Plus, you may be required to provide a personal guarantee, depending on your circumstances.

Secured loans vs. unsecured loans: What are the main differences?

When comparing secured vs. unsecured loans, the main difference is the need to commit assets as collateral. With a secured business loan, you must provide details of the assets you’re prepared to use as collateral. In an unsecured loan, businesses are not required to use any assets to secure a loan, and therefore, approvals and eligibility are based purely on other factors. 

Secured vs. unsecured loans: Pros and cons at a glance

The other differences correlate with the need (or lack of) to commit collateral to secure the loan. So, let’s look at how this influences the typical loan conditions and the pros and cons of using a secured vs. an unsecured loan:

Key benefits of secured loans

• Reduced lender risk often equates to lower interest rates
• Larger borrowing amounts compared with most unsecured loans
• Longer repayment periods are available for spreading borrowing costs
• Lower average monthly repayments due to the longer repayment schedules

Disadvantages of secured loans

• Assets used as collateral are at risk if you default on repayments 
• Ongoing repayment commitments can be a strain on cash flow over time, especially if interest rates rise and you’re tied into a long-term arrangement
• The application process can be lengthy, due to the documentation required, eligibility criteria and asset valuation  
• Start-ups can find it difficult to qualify for secured loans without a significant financial track record or valuable assets to offer
• Some lenders charge security fees

Key benefits of unsecured loans

• Wider access to capital for businesses of all sizes and circumstances
• Short-term solutions for companies with temporary or urgent funding needs
• Business assets are not at risk
• Fewer upfront fees, such as avoiding asset valuation fees 
• Usually, a more flexible loan structure
• Faster access to funds, thanks to less complicated applications and approvals

Disadvantages of unsecured loans

• Potentially higher rates due to higher perceived risk for lenders
• Shorter time to repay the loan, which can cause financial pressures if you have unexpected costs or sudden profit dips
• Limits to capital amounts from most lenders compared with secured loans

Interest rates and terms for secured and unsecured loans

Whether you have business assets to use as collateral or not, there are other key considerations when choosing a loan, such as term length, monthly repayment costs and interest rates.

Interest rates compared

While interest rates vary, depending on the lender, secured loans often offer lower interest rates, due to reduced lender risk and longer repayment schedules. 

However, it’s worth considering the deeper commitment, including ongoing interest payments and monthly outgoings, which can be an issue down the line if you encounter unexpected costs or experience a performance downturn.

While you may have higher interest rates to pay with unsecured loans, you have shorter repayment windows and faster turnaround, meaning you incur the rates for less time, which can be a more cost-efficient solution.

Repayments

Secured loans are typically used for long-term funding needs or higher volume expenses, meaning loan repayments are often spread over a longer period. 

Secured loans have repayment options from a few years up to 25 years or more. Unsecured loans are typically offered for several months up to 3-5 years, acting as a short-term finance solution to cash flow gaps or as a bridging option for a large business purchase, investment opportunity or acquisition. 

Most digital lenders providing unsecured loans offer businesses more flexibility over repayment length and the ability to make early repayments. For example, iwoca lets borrowers repay loans early or overpay, without fees, helping borrowers align monthly repayments with cash flow. 

Consider the total cost of borrowing

Lower interest rates don’t always equate to cheaper borrowing solutions. You need to consider the total cost of borrowing. This accounts for the total amount paid back by the end of the loan term (including interest incurred) plus any fees charged by the lender, such as arrangement fees, security fees, or other lender charges.

So, while you may prefer a longer loan with lower interest fees and monthly repayments, the interest incurred over the repayment schedule can be more expensive overall than a short-term loan with slightly higher interest rates. 

Also, a flexible loan agreement can be cost-efficient, reducing overall borrowing costs. iwoca allows businesses to draw funds as and when required within 30 days of approval, meaning you only pay interest on the amount used. Plus, if you repay the loan early (free of charge), it saves you unnecessary interest payments.

Assessing risk: collateral vs. personal guarantee

When taking on debt via a secured or unsecured loan, consider the risks involved in using collateral vs. a personal guarantee, such as:

• In a secured loan, your business assets are at risk, which can lead to a loss of property or equipment if you default on repayment.
• Unsecured loans often require a personal guarantee, as with assets not required as collateral, it adds a degree of protection for the lender and places the responsibility of repayments on the business owner/director, not the business assets, if your company defaults on loan payments.
• Your risk profile varies depending on business maturity, how stable your finances are (including cash reserves, working capital and forecasted revenue), business owners’ appetite (for providing any necessary personal guarantee), and the importance of business assets (if being used as collateral).

Weigh up what matters most: your peace of mind, the speed of access to funds, the cost of borrowing or the time needed to repay the loan.  

Application process and eligibility criteria

When comparing secured vs. unsecured business loan application processes, secured loan applications generally take longer, due to the additional documentation and legal checks required, plus valuation of assets used to secure the capital.   

Secured loans through banks and traditional lenders are also subject to stricter eligibility requirements, such as how long you’ve been operating and your financial track record, meaning slower approval times.

Digital lenders offering unsecured loans often have simpler criteria, based on cash flow, turnover and business performance, creating a smoother process and faster access to funds. 

At iwoca, we’ve developed a stress-free and inclusive loan application experience. 

Our tech-first underwriting speeds up applications and approvals, plus we look beyond the credit score, meaning higher approval rates and the ability to apply in a matter of minutes, without mountains of paperwork. Plus, you can expect to receive funds the same day, in most cases, within a few hours.

Find out more about our small business loans here.

What is the impact on credit score and business assets?

Most loan applications require a hard credit check, which leaves a footprint on your file and may result in a temporary dip in your score. See if prospective providers have an eligibility checklist or checker tool, which can prevent any impact on your score until you proceed with a full application.

The more significant credit and asset impact for secured and unsecured loans relates to the risk of missed payments. So, consider the following: 

• Whatever loan you choose, missing payments will damage your credit score and reputation.
• With secured loans, defaulting on loan repayments can lead to asset seizure and other long-term consequences.
• Missing repayments on an unsecured loan will impact your company’s credit profile and affect your personal credit, if a guarantee was required.

So, to reduce your risks, carefully judge the affordability of different offerings and choose a solution that suits your specific situation and financial position. You should seek manageable monthly repayments that align with your cash flow.

Flexible loan providers like iwoca offer tailored terms and the flexibility to reduce financial pressure and minimise the risks of defaulting on repayments. You can also take out a smaller loan, with options to top up* if you need later cash injections.

*Credit top-ups are subject to approval.

Choosing the right loan for your business needs

Loans from UK providers have varying conditions, so when comparing a secured vs. an unsecured loan from different lenders and evaluating features and costs, conduct a robust selection process.

Bear in mind that secured loans are generally more suited to larger-scale asset purchases and longer-term projects, while unsecured loans are often used for short-term funding needs.

So, if you’re struggling to make supplier payments, need a boost during key sales periods or want to bridge a gap in cash flow for paying your corporate tax bill, an unsecured loan is more appropriate. A secured loan is more suited to big-ticket purchases or large-scale expansion plans. However, various factors play a part in judging loan suitability for your specific business.

Suitability factors for choosing between secured and unsecured loans

• Loan size
• Repayment schedule
• Urgency – do you have time-sensitive funding needs?
• Funding purpose
• Assets – what assets do you have for collateral (if you need a secured loan)?
• Interest rates – not all lenders advertise the rates, as they can vary depending on circumstances, so you may need to contact the lender directly
• Creditworthiness – your credit rating and financial track record will be reviewed in loan applications
• Loan flexibility, such as options to repay the amount early
• Risk appetite – consider what level of risk you want to incur
• Fees/costs – estimate the total cost of borrowing and look for hidden charges

Alternative finance options to consider

Not all business finance fits into the secured vs. unsecured loan buckets, and many UK lenders offer alternative finance options. Here are some popular alternatives below:

• Lines of credit (including revolving credit): a flexible financing option where businesses can draw down funds in tranches.
• Business credit cards: easy ways to build business credit and cover regular operational purchases.
• Business account overdrafts: a buffer that allows for temporary shortfalls and gives businesses breathing space in key financial periods.
• Invoice finance: a fast source of finance to access funds tied up in pending client payments.
• Revenue-based funding: includes merchant cash advances, where repayments are made as a percentage of future card sales.
• Alternative funding methods: this includes equity finance options, like venture capital or crowdfunding, which require businesses to give up a share of equity, control or future profits as part of agreements.

The key is finding a funding solution that works for you and your business needs, and part of that is having adequate flexibility. 

iwoca’s Flexi-Loan is an unsecured, fast-access loan solution for numerous business purposes. It’s designed to meet the demands of UK SMEs, helping growing businesses navigate operational challenges, ease cash flow and access the capital they need, when they need it. 

You can borrow up to £1 million for a few weeks to as much as 60 months. We don’t change early repayment fees, and you only pay interest on the funds you use.

Find out how to get a business loan from iwoca and use our handy loan calculator to estimate monthly repayments. You can expect approval decisions within 24 hours.

Sources:

• Secured Business Loans Explained [iwoca]
• Boost Your Cash Flow with an Unsecured Business Loan [iwoca]
• What Are the Different Types of Business Loans? [British Business Bank]
• Secured vs Unsecured Business Loans – Which Is Best? [Startuploans.co.uk]

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