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  • Philip Bacon

Secured vs Unsecured Business Loans: Everything You Need to Know

Updated: Dec 18, 2023

The country has witnessed massive growth in entrepreneurship since the pandemic, with many new businesses emerging. However, starting a business and keeping it afloat requires dealing with a number of financial ups and downs.


Unless you have some secret source of unlimited financing, you may need to explore commercial finance and business loans to deal with this fluctuation. As one of the leading commercial finance brokers in the UK, we offer a wide range of business solutions to all small and large businesses looking for funding.


Today, we are here to specifically talk about secured and unsecured business loans and how you can choose the best option for your business’ financial needs. While both these business loans can help you reach your objectives, in this post, we will explore the pros and cons of secured and unsecured business loans to help you make an informed decision.


Secured Business Loans

As the name suggests, a secured business loan is usually backed by collateral in the form of real estate, inventory, or even shares and mutual fund units.


Compared to most other types of business loans, these loans have lower interest rates and longer repayment terms. However, this can also largely depend upon the creditworthiness of the borrower and the value of the collateral.


Secured loans are also easier to obtain because lenders have a lower risk of default and even then, they have a level of security. Furthermore, secured business loans also offer greater flexibility as borrowers can use them for various purposes including expansion, debt consolidation, etc.


Unsecured Business Loans

Unlike secured business loans, unsecured loans do not require collateral of any kind and are completely based on the borrower's creditworthiness.


While the terms of these loans largely, if not completely, depend on the credibility of the borrowers, they usually charge a higher rate of interest. Their repayment terms may also be shorter than most other loans as the lender here has a higher risk of default.


Pros and Cons of Secured Business Loans


Secured business loans come with a number of advantages for the borrower. However, depending on the type of loan, they can also have cons that one might not prefer to deal with. Let us explore some of the pros and cons of secured loans to help you make an informed decision:


Pros


1. Low and fixed interest rates: Since secured loans are backed by collateral, they are usually offered at a lower, fixed interest rate. This significantly reduces the cost of borrowing and makes it easier for the borrower to plan their monthly payments.


2. Larger loan amount: When it comes to secured business loans, the borrower usually has the option to borrow a larger sum depending on the security.


3. Longer repayment period: Most secured loans have a much longer repayment period as the lender has the added security of collateral. However, this depends on the borrower’s specific requirements.


4. Improved Credit Score: By regularly repaying your secured business loans, you can significantly improve your commercial credit score and increase your likelihood of getting better loans.


Cons


1. The Collateral: One of the biggest disadvantages of secured business loans is the collateral. First of all, since these loans require the pledging of collateral, most businesses might not be able to do so. Nevertheless, in the case where a business does arrange collateral to be pledged, the borrower shall always be worried about the risk of losing the collateral. Not only can this be harmful to the business but also to the personal finances of the borrower.


2. The Valuation: If the value of the collateral is lower than expected this may change the amount of credit the lender offers. In addition, if the value of the loan is greater than the value of the collateral, then it might result in a higher debt burden for the borrower.


3. The Complexity: Secured business loans are usually more complex and time-consuming than most other kinds of loans. This is because the lender is required to assess the collateral properly and evaluate the risk before giving the loan. Moreover, since these loans have more complex terms, it might also be harder for businesses to comply with them.


Pros and Cons of Unsecured Business Loans


Let’s now explore the specific pros and cons of unsecured business loans.


Pros


1. No collateral: One of the biggest benefits of an unsecured commercial loan is the fact that they require no collateral. This makes them more accessible and preferable to small businesses with less assets.


2. Quicker loans: The approval process for unsecured loans is much faster than for secured loans due to standardisation of process. Not only does this save the borrower from all the extra stress of delay but can also save a lot of time.


3. Lower risk: Given the fact that there is no collateral, the borrower takes comparatively less risk than in secured loans.


Cons


1. Higher interest rate: Unsecured business loans offer a much higher interest rate due to the increased risk at the lender’s end. The increased risk can also result in a significantly shorter repayment period.


2. Limited loan amount: Since there is no collateral, the loan amount usually depends on the creditworthiness of the business. That’s why, in some cases, the amount might be less than what the business needs.


3. Requires strong commercial credit score: To get the loan one needs, ideally the borrower has to have a strong credit score and history. A business with poor credit may find it harder to be able to borrow as much as they need on an unsecured basis.


Choose Knights Row for Your Commercial Finance Needs


Now that you have an idea of how secured and unsecured business loans work, it’s time to get in touch with us for your funding needs.


As one of the leading commercial finance brokers in the UK, we offer the best financial consultancy services to our clients. Working with virtually every business sector, we can help you find the right funding for you.


What’s more, along with secured and unsecured loans, we can also help you with commercial mortgages, bridging finance, development finance and so much more.

To learn more about our services, click here or get in touch with us now!


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