In a nutshell: Secured loans typically let you borrow larger amounts at lower interest rates by using assets like property or equipment as collateral. Unsecured loans don’t require collateral and offer greater flexibility but can come with higher rates and stricter credit checks, depending on the lender. The right choice will depend on what stage your business is at, what you need the money for and the terms you’re comfortable with.
When comparing secured vs unsecured lending, you’ll want to make sure you’re getting the most suitable deal for your business. But it’s not always clear which type of business loan is the right fit. You may have heard of asset-based loans (a type of secured loan) or traditional unsecured loans – but how do they differ?
Fortunately, you don’t need to be a finance expert to figure it out. Whether you’re looking to buy equipment, cover gaps in cash flow or fund future growth, understanding the basics will help you make the right choice with confidence. With so many options out there, it’s easier than ever to find a loan that works for your business.
In this article, we’ll explain what secured and unsecured loans are, how they’re different and which might be more suitable for your business.
What are secured and unsecured loans?
You’ll typically come across two main types of loans when you’re looking for business funding: unsecured vs secured. The main difference between them is whether you need to put up an asset (eg property, equipment or inventory) as security.
What is a secured loan?
A secured loan means borrowing money against something you own. If you can’t repay the loan, the lender can take that asset to cover their losses. Because of this, secured loans tend to offer lower interest rates and higher borrowing limits.
Secured loans can be a good option if you have valuable assets and want to keep your costs down. For example, if you’re a manufacturer looking to buy new machinery, you might use the machinery itself as collateral. Or if you own commercial property, you could use that to secure a larger loan for future expansion.
What is an unsecured loan?
An unsecured loan doesn’t require any collateral. Instead, lenders look at your credit score, business revenue and trading history to decide whether to lend to you.
Unsecured loans are typically faster to arrange, but they can come with higher interest rates and lower borrowing limits. They also offer flexibility, such as the ability to settle the loan early without incurring fees, which is often expensive or not allowed with secured loans. Unsecured loans are worth considering if you don’t have valuable assets or need to secure funds quickly – for example, to cover a sudden gap in cash flow or launch a reactive marketing campaign.
How do secured and unsecured loans work?
At first glance, secured and unsecured loans might seem quite similar. Both give you access to funds that you repay over time with interest. But there are some important differences to consider too.
How do secured loans work?
Secured loans work by linking the money you borrow to an asset you own, such as commercial property, vehicles or high-value equipment. The lender will assess the value of your asset and use it to determine how much they’re willing to lend you.
Since the lender uses the asset as security, they’re taking on less risk, which means they can offer you better terms – like lower interest rates or longer repayment periods.
The application process will usually involve an asset valuation, some legal paperwork, and may take more time than an unsecured loan. But you’ll get access to the funds once everything’s in place and you’ll repay the loan over an agreed period, just like any other loan.
The big advantage of secured loans is that you can often borrow larger amounts – sometimes up to £5 million – at rates starting from around 4%. But the downside is that, if you default on the loan, you could lose the asset you put up as collateral.
How do unsecured loans work?
Unsecured loans are simpler in some ways, since there’s no need to value assets or go through potentially lengthy legal processes. Instead, the lender will look at your business’s financial health (eg credit score, revenue and trading history) to decide whether to approve your application.
Lenders often consider unsecured loans to be riskier since there’s no collateral, so they may charge higher interest rates. You’ll also usually have to repay the loan over a shorter period.
Some lenders may also ask for a personal guarantee. This makes you personally responsible for the debt if your business can’t repay the loan. It’s not quite the same as putting up collateral, but it’s still a condition to be aware of.
Unsecured loans typically provide more flexibility, such as the option to repay early without penalties, which can be a major advantage for businesses looking to manage cash flow efficiently.
If you’re considering an unsecured loan, options like revenue-based financing or invoice finance can be flexible ways to access funds without tying up your assets.
What’s the difference between secured and unsecured loans?
The below table shows the typical loan terms you could expect to find for secured vs unsecured loans. But the exact terms you’re offered will depend on your business’s financial health and the lender you choose.
| Secured loans | Unsecured loans |
|---|
| Required (eg property, equipment) | |
| | |
| | |
| | |
| 1-4 weeks (valuation needed) | |
| Flexible (collateral offsets risk) | Varies by lender (good credit/revenue may be needed) |
| Large investments, asset-heavy sectors | Cash flow, speed, low-asset businesses |
| | Higher rates, credit score impact |
The pros and cons of secured and unsecured loans
Each type of loan has its advantages, but there are also some potential risks to be aware of. Understanding them will help you make the right choice for your business.
Pros and cons of secured loans
Pros:
You may get lower interest rates because the lender sees you as less risky (thanks to your collateral)
Longer repayment terms mean smaller, more manageable monthly payments
You can often borrow larger sums (perfect if you’re planning a big expense, like a property purchase or business growth investment)
Cons:
You could lose your asset (eg home, car, or equipment) if you miss repayments
Upfront costs (eg valuation fees and legal charges) add to the total amount you’ll pay back
The application process typically takes longer due to asset valuation and legal paperwork
Early repayment is often restricted or comes with fees
Pros and cons of unsecured loans
Pros:
Quick and easy – you could have the money in your account within days
There’s no risk to your assets if you can’t make your repayments
Suitable for urgent needs, like surprise bills or last-minute opportunities
Flexibility to repay early without penalties, which can help you save on interest costs
Cons:
Higher interest rates mean you’ll likely pay more over time
Shorter repayment terms can make monthly payments more expensive
You’ll have to meet tougher credit checks with a good credit score and steady income to qualify
You might get rejected or be offered higher interest rates if your credit history isn’t perfect
Is a secured loan or unsecured loan more suitable for your business?
The right loan for your business will depend on what you need the money for, how much you need to borrow and how quickly you need it.
Why choose a secured loan?
Secured loans can be a smart choice if you have valuable assets and want to borrow a larger amount at a lower interest rate. They’re particularly useful for long-term investments, like buying property or expensive equipment, where the lower interest rates can save you a lot of money over time.
For example, if you run a logistics company and need to buy a new fleet of vehicles, a secured loan such as vehicle finance could be a more cost-effective option. You could use the vehicles as collateral, which would help you secure a lower interest rate and spread the cost over several years. Or if you’re a manufacturer looking to upgrade your machinery, you could use the machinery itself as security.
Why choose an unsecured loan?
Unsecured loans are often better suited to shorter-term needs or situations where you don’t have assets to pledge. They also offer the flexibility to repay early without fees, making them ideal for businesses that anticipate improved cash flow or want to avoid long-term debt.
For example, you may want to consider an unsecured loan if you’re a retailer who needs extra stock for a busy trading period, or if you’re a service-based business looking to launch a new marketing campaign. In these cases, the speed and flexibility of an unsecured loan such as a merchant cash advance or invoice finance can be a big advantage. You won’t have to worry about losing an asset, and you could get the funds quickly to jump on an unexpected opportunity or to cover a gap in cash flow.
Can you mix both secured and unsecured loans?
Some businesses use a mix of both secured and unsecured loans. For example, you might take out a secured loan to fund a major purchase, like a new commercial premises, and then use an unsecured loan or credit card to cover smaller, day-to-day expenses.
Mixing both types of loan can give you the best of both worlds – lower rates for more expensive items and flexibility for everything else.
Common myths about secured and unsecured loans
There’s a lot of misinformation out there about business loans, so let’s clear up a few common myths.
Myth 1: Secured loans are only for big businesses
While secured loans are often used by established businesses, they’re not off-limits to startups. If you have an asset to pledge – like a director’s personal property – you might still be able to qualify.
Myth 2: Unsecured loans don’t affect your credit score
Just like secured loans, unsecured loans are reported to credit agencies. Missed payments can damage your credit score, so it’s important to borrow responsibly.
Myth 3: You’ll lose your home if your business fails
This could only happen if you’ve used your home as collateral. Many companies choose to only use their business assets to secure loans, which protects your personal property from risk.
Wrapping up
Choosing between a secured and unsecured loan is an important decision, but it doesn’t have to be overwhelming. The right choice will depend on your business’s needs, your financial situation, and how much risk you��re comfortable taking on.
Secured loans can be suitable if you have valuable assets to use as collateral and want to borrow larger amounts at lower interest rates. They can be particularly effective for long-term investments, like buying property or equipment, where the lower rates can save you money over time.
Unsecured loans offer speed and flexibility, making them suitable for shorter-term needs like covering gaps in cash flow or funding marketing campaigns. They also allow you to repay early without fees, which can be a big advantage. You won’t need to put up collateral, but you’ll typically be charged higher interest rates and have to pass stricter credit checks.
No matter which type of loan you choose, it’s important to understand the implications. So study the terms, compare your options, and borrow responsibly. With the right funding in place, you’ll be well-positioned to grow your business and achieve your goals.
FAQs
What’s the riskiest part of a secured loan?
The biggest risk is losing the asset you’ve put up as collateral if you can’t repay the loan. But it’s worth noting that default rates are very low (around 0.17%) due to lender caution.
How fast can I access funds?
Unsecured loans are usually the quickest to secure, with funds often made available within 24-72 hours. Secured loans tend to take longer (around 1-4 weeks) because of the valuation and legal steps involved.
Are secured loans cheaper?
Secured loans are generally cheaper than unsecured loans. Secured loans usually come with lower interest rates, starting from around 4%, while unsecured loans start at about 6% and can go higher depending on your credit profile.
What if I can’t repay?
With a secured loan, the lender can repossess the asset you’ve used as collateral. With an unsecured loan, you won’t lose an asset, but you could face damage to your credit score and potential legal action.
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