Secured vs Unsecured Business Loans: What’s the Difference?
Updated: Aug 17
When considering a business loan, one of the fundamental choices is whether the borrowing will be secured or unsecured.
An unsecured business loan doesn't require the lender to take security over a specific asset.
A secured business loan involves providing an asset — commonly property — as security for the borrowing.
That difference can affect how much you can borrow, how long you can borrow for, the interest rate, how quickly the loan can be completed and what happens if the business cannot repay.
Neither option is inherently better. The right structure depends on the business, the amount required and the purpose of the funding.
What is an unsecured business loan?
An unsecured business loan allows a company to borrow without providing a specific asset as security.
The lender primarily assesses the financial strength of the business and its ability to repay the loan from cash flow.
This will commonly involve looking at factors such as:
turnover;
cash flow;
profitability;
recent bank conduct;
existing borrowing;
trading history; and
credit history.
Because the lender doesn't normally need to value and take security over an asset, unsecured loans can often be arranged relatively quickly.
However, unsecured doesn't necessarily mean no personal liability. A lender may still require directors or shareholders to provide personal guarantees.
You can read more in our guide to What Is an Unsecured Business Loan?
What is a secured business loan?
A secured business loan involves the lender taking security over an asset.
For SME lending, this will often involve property owned by the company or by a director or shareholder, although other types of assets may potentially be used depending on the lender.
If the borrower fails to repay the loan, the security gives the lender additional rights to recover the money owed.
Because the lender has this additional protection, secured lending can potentially support larger loan amounts and longer repayment periods than would be available on an unsecured basis.
What is the main difference between secured and unsecured lending?
The key difference is the lender's security.
With a secured loan, a specific asset supports the borrowing.
With an unsecured loan, the lender doesn't take security over a particular asset and relies more heavily on the financial strength and cash flow of the business, potentially supported by personal guarantees.
This difference affects several characteristics of the loan.
Unsecured business loan | Secured business loan | |
Specific asset security | Usually no | Yes |
Personal guarantee | Often | May still be required |
Typical completion | Potentially quicker | Usually slower |
Loan amounts | Often lower | Potentially higher |
Repayment terms | Often shorter | Potentially longer |
Legal work | Usually limited | More likely |
Valuation required | Usually no | May be required |
Risk to secured asset | No specific secured asset | Asset may be at risk |
The exact terms will vary between lenders.
Can I borrow more with a secured business loan?
Potentially, yes.
A lender considering an unsecured loan needs to be comfortable with its exposure based largely on the creditworthiness and cash generation of the business.
Providing suitable security can give the lender additional protection and may allow it to consider a larger facility.
For example, a company might only qualify for £50,000 on an unsecured basis but potentially be considered for a larger amount where suitable property security is available.
That doesn't mean the value of the security determines the loan amount on its own. The lender will still normally expect the business to demonstrate sufficient cash flow to service the repayments.
Security can strengthen a lending proposition, but it doesn't replace affordability.
Are secured business loans cheaper?
They can be.
Taking good-quality security reduces the lender's potential loss if the borrower defaults. That reduced risk can sometimes result in a lower interest rate.
However, interest isn't the only cost to consider.
Secured lending can also involve:
valuation fees;
legal fees;
security registration costs; and
other completion expenses.
Businesses should therefore compare the overall cost and structure of the facility, rather than simply comparing headline interest rates.
For a relatively small loan, the additional costs and work involved in taking security may make an unsecured facility more practical even if its interest rate is higher.
For larger or longer-term borrowing, the economics may favour secured lending.
Are unsecured business loans faster?
Generally, they can be.
An unsecured lender doesn't normally need to arrange a property valuation or complete the legal work required to take property security.
A straightforward unsecured application can therefore potentially be assessed and completed quickly.
Secured lending can involve additional steps such as:
establishing ownership of the asset;
obtaining details of existing charges;
carrying out a valuation;
instructing solicitors;
preparing security documentation; and
registering the lender's security.
That means completion may take longer.
If a business needs funding urgently, the difference in timing may be an important consideration.
Do secured loans have longer repayment terms?
Often, although this depends on the lender.
Unsecured SME loans are frequently provided over relatively short or medium-term periods.
Secured lending can potentially extend over longer periods because the lender has additional protection and the facility may be larger.
The repayment term matters because it directly affects cash flow.
A £100,000 loan repaid over 12 months places a very different burden on a business from £100,000 repaid over five years.
A longer term can reduce regular repayments, although it may increase the total interest paid over the life of the loan.
What happens if I can't repay a secured business loan?
This is one of the most important differences to understand.
If the business defaults on a secured loan, the lender may ultimately be entitled to enforce its security to recover the debt.
Where the security is property, this could ultimately put that property at risk.
Enforcement isn't necessarily the lender's first response to a missed payment, but borrowers should understand the potential consequences before granting security.
Providing security should therefore never be treated simply as an administrative step required to obtain a better interest rate.
What happens if I can't repay an unsecured business loan?
The absence of specific asset security doesn't mean that an unpaid unsecured loan simply disappears.
The lender can pursue the company for the outstanding debt and may take legal or insolvency action where appropriate.
If a director or shareholder has provided a personal guarantee, the lender may also have rights against that guarantor if the company fails to meet its obligations.
This is why it is important to distinguish between unsecured lending and lending without recourse. They aren't the same thing.
What is a personal guarantee?
A personal guarantee is a commitment from an individual, usually a director or shareholder, to meet the company's obligations if the business fails to do so.
Personal guarantees are common in SME lending, particularly for unsecured loans. They can also be required for secured lending.
For example, a lender might take security over a property and also require personal guarantees from the company's directors.
Anyone providing a personal guarantee should understand the legal and financial implications before signing it.
Which option is better for a smaller business loan?
For relatively modest funding requirements, unsecured lending can often be the more straightforward option.
If an established business needs £20,000 or £30,000 of working capital and can comfortably support the repayments, going through property valuations and additional legal work may be disproportionate.
Unsecured lending can provide a simpler and faster solution.
As the amount required increases, secured lending may become more attractive because it can potentially provide access to larger amounts, longer terms and lower pricing.
There isn't a precise point at which one becomes better than the other.
When might an unsecured business loan make sense?
An unsecured loan may be appropriate where:
the funding requirement is relatively modest;
the business needs the money quickly;
there is no suitable asset to provide as security;
the business has strong enough cash flow to support the repayments; or
the borrower doesn't want to go through the secured lending process.
Typical uses could include working capital, stock purchases, recruitment, equipment or short-term expansion costs.
When might a secured business loan make sense?
Secured lending may be worth considering where:
the business requires a larger amount;
a longer repayment period is desirable;
suitable security is available;
reducing regular repayments is important;
unsecured borrowing capacity is insufficient; or
the pricing advantage justifies the additional work and costs.
The purpose of the borrowing can also influence the appropriate structure.
Longer-term investment is often better matched with longer-term finance than with a short-term loan requiring rapid repayment.
Can I choose between secured and unsecured lending?
Sometimes.
A financially strong business with suitable assets may have both options available.
In other cas
es, the lender may only be prepared to provide the requested amount if security is available.
For example, a lender might be comfortable offering £50,000 unsecured but require security to consider a request for £150,000.
Rather than looking at security in isolation, businesses should compare the complete propositions:
How much can I borrow? How long do I have to repay it? What will the repayments be?
What will it cost? What security or guarantees am I providing?
Those questions usually provide a better comparison than the interest rate alone.
Secured and unsecured business loans from Adelpha Capital
Adelpha Capital provides both secured and unsecured finance to established UK SMEs.
The appropriate structure depends on the amount required, the financial position of the business and the purpose of the borrowing.
We assess applications individually and consider factors including turnover, cash flow, trading history, recent bank conduct and existing financial commitments.
If you're considering business finance, you can apply online or contact the Adelpha Capital team to discuss your requirements.