The main difference between a secured and unsecured business loan is that a secured loan is backed by a specific asset the lender can claim if you default. An unsecured loan isn’t tied to any asset and relies mainly on your business’s creditworthiness and trading history instead. This affects how much you can borrow, the rate you’re offered, and what’s at risk if repayments aren’t kept up.
What Counts as Security on a Secured Business Loan?
Security on a secured business loan is an asset the lender can take and sell to recover their money if you fail to repay the loan. Commonly used security includes commercial property, equipment or machinery, vehicles, and sometimes unpaid invoices or cash deposits, depending on the lender and the type of loan.
The asset used as security doesn’t necessarily need to relate to what the loan is for, as some lenders will accept a general charge over business assets rather than one specific item.
Are Interest Rates Different Between Secured and Unsecured Loans?
Yes, secured loans generally come with lower interest rates than unsecured loans, since the lender has a reduced level of risk if something goes wrong, they have an asset to fall back on. Unsecured loans tend to carry higher rates to reflect the fact that the lender is relying more heavily on your business’s financial strength and credit history, without a specific asset to recover their money from.
Can I Borrow More With a Secured Loan?
Yes, providing security can lead to more preferable rates and amounts. Lenders are often willing to offer larger amounts against a secured loan, since the value of the asset gives them a level of security that reduces their overall risk. The amount you can borrow is usually linked to the value of the asset offered, so a more valuable property or piece of equipment can typically support a larger loan than a lower-value asset would.
Do Unsecured Loans Still Require a Guarantee?
Loans for smaller or newer businesses can require a guarantee. Even though an unsecured loan isn’t tied to a specific business asset, many lenders still ask directors to sign a personal guarantee, which makes them personally responsible for the debt if the business can’t repay it. This gives the lender some recourse even without a specific asset attached to the loan, which is part of why unsecured lending decisions still lean heavily on personal credit history.
What Happens If I Default on a Secured Loan?
If you default on a secured loan, the lender has the right to take possession of the asset used as security and sell it to recover what’s owed. For loans secured against property, this can mean the lender forcing a sale, while for equipment or vehicles, it typically means repossession. If the sale of the asset doesn’t cover the full amount owed, you may still be liable for the remaining balance.
What Happens If I Default on an Unsecured Loan?
Defaulting on an unsecured loan doesn’t put a specific asset immediately at risk, but the lender can still pursue the debt through other means, including passing it to a debt collection agency, taking legal action, or calling in a personal guarantee if one was given. A default will also be recorded on your credit file, which can make it significantly harder to access finance in the future.
What Happens If I Default on a Secured Loan?
If you default on a secured loan, the lender has the right to take possession of the asset used as security and sell it to recover what’s owed. For loans secured against property, this can mean the lender forcing a sale, while for equipment or vehicles, it typically means repossession. If the sale of the asset doesn’t cover the full amount owed, you may still be liable for the remaining balance.
See also: Can I Get a Loan with No Guarantee
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