Understanding-Secured-and-Unsecured-Business-Loans

The difference between secured and unsecured business loans and what this means for you 

When considering funding options for your business, several choices can be suitable for starting up or facilitating growth. A secured business loan entails the lender taking one or more of your company’s tangible assets as ‘security.’ These assets may include premises, a company vehicle, or plant and machinery.

Secured lending is more accessible than unsecured loans, as the lender’s risk of non-payment is diminished. However, unsecured loans might be more advantageous for your business, as they do not pose a risk of losing assets in the event of financial challenges.

 

What are the features of a secured business loan?

When obtaining a secured business loan, the lender will demand collateral to mitigate their risk exposure. In the event of your company defaulting on the loan, the lender can reclaim funds by taking ownership of the asset and selling it.

Secured business loans typically come with extended repayment terms compared to unsecured loans. These loans often have higher amounts, making them a preferable choice if your company has an unfavourable credit rating.

 

Advantages of secured borrowing

  • Secured loans generally offer lower costs, given the reduced risk for the lender
  • Larger loan amounts are accessible through secured loans
  • Favourable repayment terms, often extended over a longer period
  • Utilising business assets as security allows for business growth, even with a low credit rating

 

Disadvantages

  • Securing a loan may entail a lengthier process due to asset valuation and other diligence measures by the lender
  • Valuable business assets are at risk in the event of loan default
  • Upfront costs may be applicable

 

Unsecured lending for business

To secure an unsecured loan from your bank, you might be required to furnish a personal guarantee. This guarantee becomes enforceable if your company fails to meet repayment obligations, compelling you to repay the loan from your personal funds.

Director personal guarantees are common nowadays, and obtaining a ‘traditional’ business loan without one is challenging unless you offer security to the lender. The challenge lies in the fact that some directors sign guarantees under the mistaken belief that they will never be invoked.

 

Advantages of unsecured loans

  • Unsecured loans are quicker to obtain compared to secured loans
  • There’s no need to risk the loss of valuable business assets as collateral
  • Flexibility in repayment terms is possible with unsecured loans

 

Disadvantages

  • Obtaining a large amount through an unsecured loan might not be feasible
  • Unsecured loans typically carry higher costs compared to secured loans
  • A personal guarantee may be necessary, reducing the lender’s risk in the absence of collateral

 

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Specialist lenders for funding your business

Vanguard Insolvency maintains professional connections with over 50 alternative loan providers across the country. We can aid you in finding suitable funding for your business and support you through the application process.

Various options are available for alternative funding, and the choice depends on your business operations. If your business has a significant number of credit sales, you might secure a factoring or invoice discounting arrangement. Alternatively, businesses with high-value assets could potentially leverage their worth to obtain a lump sum cash injection. 

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.