In most cases, the answer to this question is simple: It's up to you.
Secured and unsecured loans each offer benefits to small business owners. At the top level, the terms of a secured loan are usually more flexible than one without security, because the lender faces a lower level of risk.
But obviously, there's a bit more to it than that. This blog post will delve deeper into the question of secured vs unsecured small business loans. After reading, you'll have the information you need to decide which is the right for you and the best for your business.
Secured loans for small business
We'll start with secured loans.
What is a secured loan?
A secured loan uses an asset (or assets) as collateral, providing a layer of security against which the lender can recoup losses in the event of a default.
Because the lender faces a lower amount of risk than a loan without security, the terms for a secured loan are often more favourable for the borrower. Think larger loan amounts, lower interest rates, and the possibility of longer repayment terms.
How does a secured loan work?
During your loan application, you'll nominate the asset(s) against which to secure the loan. You can use many things as assets, including property, land, vehicles, machinery, inventory, equipment, and more.
The value of the asset(s) determines how much you're able to borrow. If you default on the loan (i.e., you're unable to make repayments as agreed), the lender will look to recoup their losses through the acquisition of the nominated assets, as outlined in the loan contract.
Be aware that the process for valuing assets can extend the application process, meaning a secured loan can take longer to arrange than an unsecured one.
Can I get a secured loan?
Many small business owners ask this question, and the answer depends on their situation.
If your business has strong financials and owns high-value assets, an application for a secured loan is more likely to succeed. Your financial situation demonstrates a couple of things to the lender:
- Good credit shows that, historically, you've been able to make (re)payments in full and on time.
- Healthy profits show that your current situation presents little risk of cashflow interruptions preventing repayment.
- A solid business plan shows that your future position will most likely stay stable.
- Possession of high-value assets shows that an alternative mechanism exists through which the lender can recoup their losses.
Unsecured loans for small business
Next up are unsecured loans. After reading the previous section, you'll probably have some idea of what an unsecured loan entails, so no prizes for guessing!
What is an unsecured loan?
An unsecured loan is one with no security or collateral. The lender accepts more risk in this type of borrowing, lessening many of the favourable terms offered by a secured loan.
How does an unsecured loan work?
The first step is submitting the loan application, in which you'll detail your financial situation and the amount you want to borrow.
While unsecured finance is often quicker to arrange, it's likely the maximum amount offered to borrow will be lower. This is to offset the increased risk to the lender.
In the absence of valuable assets, unsecured loans rely more on the strength of your business. Each lender will have their lending criteria, but they'll likely all look at three of the factors we mentioned earlier: credit rating, current financial situation, and your business plan.
With this in mind, it might be trickier for fledgeling businesses to secure unsecured finance because of their shorter trading history.
Small business owners looking for unsecured finance have other options, though. A guarantor (usually a company director) can provide a letter of guarantee, agreeing to cover missed payments and recoup losses. This safety net for the lender increases the likelihood of acceptance.
Can I get an unsecured loan?
As with secured loans, it all depends on your financial situation and history.
If you're a small business owner and you've got doubts about your eligibility for an unsecured loan, get in touch. Funding Guru prides itself on matching business owners with the finances they need to succeed.
Pros and cons of secured and unsecured small business loans
To conclude, here's an at-a-glance list of benefits and drawbacks of each funding type:
Secured business loans:
✔ Higher loan amounts.
✔ Longer repayment terms.
✔ Lower interest rates.
✔ Flexibility in the asset(s) that can be borrowed against.
✔ No need for a guarantor.
✔ Less scrutiny of your financial situation.
✔ Suitable for established businesses.
❌ Your assets are at risk.
❌ Can take longer to arrange.
Unsecured business loans:
✔ Quicker to arrange.
✔ Small amounts are more readily available.
✔ No reliance on high-value assets.
✔ Assets aren't at risk.
❌ Lower maximum loan amount.
❌ Can be harder for fledgeling businesses to acquire.
❌ Relies on a stronger financial situation.
So, which one is best for your business?
Weighing secured and unsecured loans against each other, you'll see that each has benefits and drawbacks. The best loan for your business will depend on your situation, and what you're looking to achieve.
If your business is asset rich but cash poor, and you want to unlock the value of your assets, secured finance could be the right answer.
If your financial situation is good and you're looking for a bit of extra capital for a short-term project, unsecured finance fits the bill.
However, real-life is rarely so clear cut. When applying for a small business loan with Funding Guru, we'll help you to find the most suitable finance solution for your needs.