Secured vs unsecured business loans: which is right for your start up?

Comparing secured vs unsecured business loans can help you choose the right funding route for your start up, based on how much you need to borrow, how quickly you need the money and the level of risk you are comfortable taking.

This guide explains the key differences between secured and unsecured business loans, the pros and cons of each option, and how Start Up Loans can support new UK businesses.

For many business owners, the decision comes down to a simple trade-off: secured loans may offer larger amounts and longer repayment terms, while unsecured loans can be quicker to arrange and do not require you to use property or another asset as security.

Before applying, compare the total cost of borrowing, repayment term, eligibility criteria and what happens if your business cannot keep up with repayments.

Use the sections below to compare secured and unsecured business loans and decide which option best fits your start up’s needs.

What is a secured business loan?

A secured loan is typically available from banks, and uses property that you own - such as your home - as security against the loan amount.

As the loan is secured by an asset, it's also known as asset-backed lending.

This means that you borrow a set amount and if you don't keep up with loan repayments, you could lose your asset.

Types of secured loans include where a company director uses their private home to raise money for a business - similar to remortgaging - or to raise money to purchase machinery or another business with the loan secured against company assets, such as business premises.

Advantages of a secured loan

• Larger loan amounts - you can borrow more money with a secured loan, usually up to around £125,000 depending on the amount of equity available in the property you are securing the loan against.
• Longer periods to pay back - loans can stretch beyond the typical 3-5 years of an unsecured loan, giving you longer to pay the loan back.
• Lower repayments - as the secured loan can be paid back over a longer period and interest rates are low, repayments can be lower and more easily budgeted for, which is ideal for a new business where cash flow can be a challenge.
• Good for poorer credit history - lenders prefer secured loans for borrowers with a less-than-perfect credit history, as they know the amount can be repaid in the event of a loan default.

Disadvantages of a secured loan

• Secured against property - if your business doesn't generate enough cash to meet secured loan repayments and you fall behind with loan repayments, the lender can repossess your home.
• Upfront costs - applying for a secured loan is like applying for a mortgage, and there may be administration fees to pay before you get the loan.
• Slow to obtain - obtaining a secured loan takes longer as it involves property valuations and legal requirements.

What is an unsecured business loan?

Available from a wide range of lenders, an unsecured loan doesn't require property to secure the loan amount.

If you have a good credit history, then obtaining an unsecured loan is relatively straightforward.

Unlike remortgaging, interest rates tend to be much higher. Check the APR - or Annual Percentage Rate - as this also includes any fees included by the lender for the provision of the loan.

Examples of unsecured loans for small businesses include cash flow loans and working capital loans, such as covering slower off-peak trading periods against peak revenue you'll generate in the future to pay back the loan.

Advantages of an unsecured loan

• Smaller loan amounts - If you need only a small amount, such as £15,000, then an unsecured loan makes sense especially if you've property and don't want to expose it to the risk of repossession.
• Flexible repayment periods - unsecured loans can have any repayment period, up to around five years. The longer the loan period, the lower the interest rate you'll be charged on the loan.
• Good for those already trading - as the loan is unsecured, the lender will assess it against your business's trading position. They will also perform background checks such as your credit history, cash flow position, balance sheet, cash reserves and may ask for a personal guarantee against the loan.
• Quicker to obtain - unsecured loans for small amounts are quicker to get approved, with fewer processes and legal headaches.
• Lower property exposure - no need to put up property as security and few admin costs.

Disadvantages of an unsecured loan

• Can be harder to access - if you don't have a strong trading position, it can be difficult to get a large unsecured loan.
  Not good for large amounts - lenders typically won't lend more than around £25,000 as an unsecured loan even to a solid business, and loans higher than £40,000 are very rare.

Secured vs unsecured business loans: how to choose

A secured business loan may be suitable if you need to borrow a larger amount, want a longer repayment term and have an asset you are prepared to use as security. An unsecured business loan may be suitable if you need a smaller amount, want a faster application process and do not want to secure the loan against property.

Neither option is automatically better. The right choice depends on your business plan, cash flow forecast, credit history, available assets and appetite for risk. If you are unsure, seek independent financial advice before committing to any borrowing.

How unsecured loans from Start Up Loans differ

At Start Up Loans we know that it can be tricky to access finance for your start up business if you haven't been trading or don't have proof of demand yet.

However, unlike many loan providers, we lend to businesses that have not yet started trading, or have only been trading for up to 24 months.

The loan is unsecured and personal so we don't require any assets or percentage of the business.
We also provide support with business plans and cash flow forecasts, as well as free business mentoring with each loan, which makes us the perfect choice for start ups.