Starting and growing a business requires capital which some people don’t always have at hand. Whether the capital is used to hire new employees, open new commercial offices or even buy equipment. Either way, if used wisely, the benefits can be endless.
The most common types of loans for businesses are secured or unsecured. Both options can help companies cash flow, but which business finance option is best for you?
What is a Secured Loan?
Secured business loans are a ‘credit agreement’ where lenders provide businesses with a certain amount of money, and in return, you give them security over a residential property (when a business’s property or an owner’s residential property is used as collateral).
Basically, the amount of money businesses can get from secured loans will depend on the available equity in their property/properties. Put simply, the more equity you have in your chosen assets, the more money you will be able to get.
Because of the collateral, there is less risk for lenders which essentially makes it easier to get approved. This also means businesses can borrow funds for longer periods, up to 30 years, which also benefits them as their monthly repayments won’t be as substantial.
When applying for secured loans, businesses must have the following details ready:
- Business details: full business name and details of guarantors
- Permission to perform personal searches
- Amount required, the length of borrowing and the reason funds are required
- Details of the security property (including full address, approximate value, and details of any existing charges)
What is an Unsecured Business Loan?
Unsecured business loans are typically used for pretty much any business purpose, from purchasing stock, covering bills or refinancing existing debt. Unlike secured loans, secured business loans do not require any collateral. The lender sends you cash and you promise to pay them back in the future, with interest.
Unsecured business loans are a great way to pay off things and bring capital to your business without providing security in the form of a property, which is one of the biggest risks with secured loans.
An advantage of unsecured loans is that the interest rates are also getting cheaper – starting from 3.9%, which is actually less than some mortgage interest deals available in the market.
Applicants will need the following when applying for an unsecured loan:
- Last 6 months’ bank statements
- Company accounts
- Personal details of the business director
Which is best for your business?
Secured and unsecured loans can both provide businesses with significant growth opportunities, but it’s important to keep the following in mind when making the decision for both, for example, are you willing to offer UK property as security, and how quick do you require the funds?
Flexibility vs cost
Although secured business loans are cheaper and more common than unsecured loans, they come with a lot less flexibility. For example, secured loans usually come with locked periods and early settlement fees, so there may be some challenges if you decide you want to repay your loan early.
Whereas unsecured business loans allow you to settle early without paying a penalty, as well as making overpayments towards your loan to reduce monthly commitments.
In summary, it comes down to whether you are willing to use UK property as security, as without this a Secured Business Loan is not possible to access. Interest rates are becoming more competitive in the Unsecured space, so flexibility also becomes a key factor when considering what option works best for your business.
To conclude, both secured and unsecured business loans have their benefits. To help you make your decision, speak to industry experts to understand what option works best for your business.