Most business owners know, when looking at financing options, that there are two type of business loan; secured and unsecured. But which one is right for your business?
Secured v Unsecured
Acknowledging the need for finance is just a precursor to making the big decision of choosing either secured or unsecured business loans. Both offer different features.
Secured Business Loans
This is the more common offering from banks and other traditional lenders. The security aspect is the credit agreement that uses your owned assets as collateral in assessing how the debt is repaid if the business is unable to.
When a loan amount is secured by something of value that you already own, it can be taken in the event repayments are missed.
Because of the added security, using collateral assets against the loan, lenders tend to be able to offer larger amounts than unsecured loans. Even those with tarnished credit records will have a better chance of accessing one and they offer longer repayment terms.
- Usually tied to larger amounts
- Debt owed is secured by assets
- Mitigates adverse credit history
- Homeowners might use their family home as security against debt
- Term and rate linked to the equity/value in your asset
- Flexible repayment terms
- Interest rates are lower
- Payments tend to be cheaper
Unsecured Business Loans
Unsecured loans can also be offered by banks, but their popularity has been surpassed by other funding institutions, which usually offer more flexible repayment options than the banks or traditional lenders did anyway.
The growth of peer-to-peer lending platforms, a result of the inflexibility of the high street lenders during the economic slowdown, has resulted in a much wider choice of unsecured funding options.
Because unsecured business loans are not secured by an asset, they are generally perceived to be of a higher risk for the lender. This usually translates as higher interest rates, smaller amounts and shorter terms. This is the main reason that most alternative finance secures something against the loan (asset-finance, invoice-finance etc.).
Unsecured lending takes a good look at the performance of your business; your turnover, projections and credit history have a weighted value in assessing what amount can be loaned.
- no assets or homes are at risk
- beneficial for established companies
- good credit history required
- provable growth projections
Unfortunately, this isn’t always criteria that all new enterprises or startups can fulfil.
Which business finance is best for your company?
Interest rates on both secured and unsecured loans can vary, often widely, so establishing the best fit for your company is essential.
When going down the traditional bank loan route, to even be considered for a loan, in the ever tightening pool of successful bank loan applications, you better have some security in place.
This isn’t always possible and there are an increasing amount of business enterprises that don’t operate either expensive machinery, plant, own their own premises or have enough equity in their assets to borrow against them.
This is especially true for consultancy, tech, software, recruitment or another service-based company where advice or support replaces product as the main currency.
For instance the tech industry, with less than tangible assets, like a software enterprise, which has little more than a bank of computers, rented office space and a super fast wifi router, isn’t going to have the same kind of assets as a manufacturing plant looking to take over a rival.
For the software enterprise this can be a problem if you are looking to raise a large amount for a new project, where you’ll need additional developer talent to build a new software platform or application.
In this case unsecured business loans can hold the key to unlocking business expansion.
However, the manufacturer with plant and premises to use as security can take advantage of secured funding options like invoice finance, asset finance or a long term, low interest business loan.
Deciding what finance option to choose all depends on your own circumstances, the amount you want to borrow and how much you need. There isn’t a one-business-loan-fits-all product on the market. If there was, it would either be amazing or utterly useless!
We can help you discover what’s best for your business. Contact us to talk through your options or request a call back below.