Are Small Business Loans Secured or Unsecured?

A small business loan can be either secured or unsecured, depending on a business’s financial health and the lender’s requirements.

This allows the business borrowing the funds, the option to choose between a lower-risk, collateral-backed loan or a higher-cost, unsecured loan.

So, how does a business determine what the right type of loan is for them? Ultimately, a business needs to weigh up its need for funds against how much it can realistically repay, its assets and its risk tolerance, before deciding.

A secured business loan means that the business looking to borrow the money needs to offer collateral to back the loan and provide security to the lender.

This can include property, equipment, inventory, intellectual property, stocks and bonds, and even personal assets.

Secured business loans tend to have approval rates of around 70% to 90% and come with higher borrowing limits and lower interest rates. This is because the lender’s risk is significantly reduced by the collateral put up to secure the loan.

However, secured loans often come at a higher risk to the borrower than an unsecured loan. The assets of the business that were used as collateral can be repossessed to cover the remaining debt, severely impacting the operations of the business.

Secured loans also typically come with more charges attached to them, including valuation and legal fees. 

An unsecured loan doesn't require any collateral, instead, the lender will look at a business’s financial records, credit history, cash flow, industry stability, and experience, to determine loan eligibility. 

The advantages of opting for an unsecured business loan are that none of the business’s assets are put at risk, the loan application process is typically faster, and the interest rate is typically set at a fixed rate for the term.

The typical interest rates for an unsecured business loan in the UK, range between 6 to 15% APR, but can be higher depending on your credit profile.

However, it’s still important to note that unsecured loans typically have higher interest rates than secured loans and the amount a business can borrow is usually less than a secured loan.

So, how do you decide which is the best small business loan for your business? Here are some examples of when a secured and unsecured business loan works best. 

Scenario 1: A new retail business is looking for a loan of £25,000 to invest in its marketing. It has only been open for 6 months with a limited trading history and financial records but owns its property and inventory. 

Secured Loan: This type of business is unlikely to qualify for an unsecured loan, however, as the company has assets that it could use as collateral, it is much more likely to qualify for a secured loan.

Due to the business being new and needing money to invest in its growth via marketing, a secured loan could also be more beneficial as it has lower interest rates and higher loan amounts available. 

Scenario 2: A restaurant chain that’s been running for 10 years with strong financial records and a good credit score wants to open a new location and requires a £200,000 loan. 

Unsecured Loan: Due to the business’s strong financial position, long operating history, and good credit score, the business is highly likely to qualify for an unsecured loan.

This means the company will benefit from a faster approval process with quicker access to funds, and adjustable repayment plans, and it won’t be required to provide collateral.

Overall, if a business can qualify for an unsecured business loan, it is often a better choice as no collateral is required, so there is no risk to valuable assets.

Unsecured loans also offer a faster and simpler application and approval process, quicker access to funds, and can be more flexible with their terms - making them a great choice for businesses looking to scale promptly. 

At BEF, most of the loans we offer are unsecured, but we ask you to sign a personal guarantee.

The personal guarantee is taken to back up our loans, and is a legal promise that in the event you cannot repay the loan, the lender can ask the guarantor to make payment on the borrower’s behalf.

This allows us to offer loans with fair and affordable terms regarding interest and how much you can borrow. For more information on our loans, please read our personal guarantee notice.