Managing your finances, whether on a business or personal level, can be a daunting process, made worse by the seemingly countless options out there for obtaining finance. For businesses, however, it can come down to one simple question – which is best for your company?
Every corporation, firm or small business or start-up can need a cash injection from time to time, and the risks associated with taking out loans can be overwhelming but with the right loan type for your business, you could reduce risks and optimise your finance.
From secured loans from banks to unsecured loans direct lenders, understanding both types is the key to determining which is best for your business so you can apply for personal loans now with confidence. We’ve compiled this guide to help you make that all-important decision.
What is a secured loan?
If you’ve ever had a mortgage, car finance or even a mobile credit plan, you’ll have experienced a form of secured loan. In simple terms, secured loans are any form of finance offered against an asset that you own. They provide the lender with security in that they can repossess the asset in cases where you haven’t or cannot pay the agreed repayments. For businesses, secured loans can be taken out against an array of assets, including the premises, vehicles, machinery and more, all dependant on what your business has to offer.
For this reason, secured loans aren’t always suitable for every business. For start-ups, the risk of losing assets can be too high, particularly if you don’t have much to give. If you’re renting your property, for example, you’ll rarely be able to use this as a form of asset, and so another asset of equal or high enough value may need to be found.
Secured loans unlock the money otherwise caught up in physical assets. If you have a company car, for example, a secured loan can unlock the car’s value while providing the lender of choice with the peace of mind and security they need to lend. All financial providers will assess risk before lending you any finance, including affordability checks, but you should always take care not to offer any assets that you cannot afford to lose.
Why might you choose a secured loan?
If you are unsure whether a secured loan is best for your business, looking at the benefits may help you to decide one way or the other. The most common benefits include:
Larger loan amounts
If you’re looking for significantly large amounts of money, then opting for a secured loan may be your only option. While some unsecured lenders will offer large amounts without the need for an asset, secured loans typically unlock higher amounts due to the reduced risk for the lender. All financial institutions, whether that’s a bank, direct lender or alternative lender, will feel safer lending large amounts where there is some form of collateral available. Regardless, you need to take care that you can actually afford the loan before you apply.
Lower interest rates
Due to the secure nature of the loan, you’ll likely be able to access lower interest rates overall. Some lenders can charge higher interest rates on unsecured loans in order to counter the risk but with collateral, these can be lowered.
Can still borrow with poor credit
Mistakes and simple changes can poorly affect a credit score and in cases where these mistakes or changes weren’t our fault, it can be frustrating when we receive a bad credit report, particularly when it affects our finance options. If you or your business have poor credit, secured loans from some lenders could still be a possibility. With various affordability checks and suitable collateral, lenders may still be willing to provide you with a loan.
Longer repayment terms
Depending on the collateral you’re offering and the amount you want to borrow, secured loans can offer longer repayment periods than unsecured loans. For businesses looking for larger amounts, this can mean better money management, smaller repayment amounts and a more manageable loan.
Before you opt for a secured loan, however, you need to take into account that they can be slow to obtain, often include upfront costs such as administration fees and, of course, are secured against an asset that you could risk losing.
What is an unsecured loan?
On the opposite end of the scale are unsecured loans. The key difference between secured and unsecured rests in the need, or lack of need for an asset as collateral. Unsecured loans don’t require any assets as security and so providing you have a fair credit history, it’s relatively simple to get hold of the finance you need. Interest rates can be higher on an APR basis but are also paid back in a shorter period, so can work out just as affordable if you’re borrowing smaller amounts.
In order to mitigate the risk of having no collateral, lenders will offer lower amounts for shorter periods of time, but this can work in your favour if you’re only looking for amounts up to £15,000 or so. Lenders will usually take a look at your business or personal credit history and regular income and turnover before making a decision on accepting your loan application, but this can typically happen faster than with secured loans. The loan is still legally binding even without an asset involved, with agreed repayments, interest rates and legal terms to consider if you default.
While you can’t lose a particular asset if you are unable to pay back a loan on time, there are risks of legal action and court judgments depending on the severity of the case. For this reason, it’s important to only borrow what your business can afford. In all cases, lenders will conduct affordability assessments regardless to protect both themselves, and you and your business, and may adjust the requested amounts or repayment periods accordingly.
Why might you choose an unsecured loan?
Unsecured loans, while convenient in cases where smaller monetary amounts are needed, have benefits beyond just that:
If time is of the essence, unsecured loans offer relatively quick access to funds in most cases. Without assets involved, there are no valuations that need to take place, and the smaller loan amounts can be approved much more quickly. For this reason, some lenders will offer ‘instant’ loan decisions if you have a good credit score. For those with a poor credit history, it may take slightly longer to make the decision, as the lender may conduct additional checks to determine your eligibility, rather than relying entirely on credit scores.
No assets needed
For small businesses or start-ups, the lack of asset requirement makes unsecured loans much more accessible. There is no risk of losing any property or your premises if you reach a financial problem in the future, meaning you retain control over your assets completely.
Good for small amounts
If you’re only looking for a short amount, unsecured loans are ideal. If you have no need to borrow a larger sum of money, you don’t need to opt for secured loans in order to obtain it, and so unsecured alternatives could be the right option for your business in these cases.
Shorter repayment periods
If you only need to get through a short period of time with the money borrowed, short repayment periods save you from having a debt hanging over your head for longer than necessary. Cash Flow advances, for example, are ideal for businesses that need small loans to fill financial gaps that will repay the amount when the money becomes available.
Which is best for my business?
When it comes down to deciding which loan is best for you, you need to look at what you’re going to be using the loan for. Secured loans are typically ideal for businesses seeking larger amounts, whether that’s to start up your business for the first time, invest in a property, or simply obtain working capital. They are also ideal for businesses who don’t meet standard loan criteria, who don’t have a strong or high credit score and who might need longer to repay their loan.
Unsecured loans, on the other hand, are better for short cash injections. This can be to invest in equipment or to get through a seasonal slump or off-peak trading periods. Seasonal businesses such as hotels, B&Bs, travel agents and more, may find that a small unsecured loan could help them cover lost funds over the slower months, with the option to repay back the amount when business picks up again in high season.
Where can I access these loans?
Depending on whether you want to opt for a secured or unsecured loan, you’ll need to know where you can go to apply for the funds. Generally speaking, you can obtain trustworthy business funds from Banks, direct lenders and peer-to-peer lenders:
Banks are the traditional port of call for businesses looking to take out secured loans. This traditional approach is one of the most common simply due to its familiarity with businesses who are seeking a trustworthy and secure loan option. However, while they are one of the longest-standing lending facilities, Bank loans can be notoriously difficult to get, particularly if you have limited proven financial history as a business. Some banking institutions might require business plans, projections and financial forecasts to name just a few documents and even then, may still reject the application. In fact, it’s suggested that 50% of first-time borrowers tend to try and access bank funding first and are rejected.
For this reason, direct loans lenders and alternative lenders have stepped up to the plate, offering a number of different options for finance for businesses. The increase in banking rejection has driven businesses towards these options and can often result in better monetary value in the long-term.
Direct loans lender
Direct loans lenders, whether secured or unsecured, can offer finance to businesses without the need for banking approval. They work as financial institutions offering financial support with standard borrow-and-repay-monthly loans. Interest rates can sometimes be higher than with a bank, but over the years, have shifted to become on-par and even lower than banks. While the taboo of borrowing from direct lenders has slowed the growth of the industry, changing regulation and growing trust has opened up this option as one that more and more people are actually considering.
Whether through direct investment, or crowdfunding, peer-to-peer lending has become a popular option for start-ups and small businesses in particular. While it’s not a guaranteed finance option, businesses that can build up the attention and trust in their existing and potential customers enough to warrant investing can obtain finance, often without the need to pay it back.
However, this option isn’t fool proof. You need to have a product to hand that people want or in the case of angel investors, a business plan that may prove to offer a return on their investment. Like Banks, it can be difficult to convince people to part with their cash, particularly if it isn’t going to be paid back to them, and so peer-to-peer lending isn’t always an option for every company.
When it comes to business loans, secured and unsecured loans differ greatly but each offers their own benefits. For borrowing larger amounts for longer periods of time, secured loans offer security to the lender and easier access to funds for you and your business. For unsecured loans, the repayment periods are shorter for smaller amounts, ultimately offering businesses a quick cash solution in rough or emergency monetary situations.
If you’re still unsure on the type of loan best for your business, take a look at your finances – what can you afford, and how much do you need to borrow? Do you have any assets that can be used as collateral, or do you need an unsecured alternative? Hopefully, from there, this guide can help you take the first steps to find a loan that suits you and your brand.