Secured vs unsecured business loans: how to choose

A secured loan is backed by property or assets that you own, while an unsecured loan does not require any asset to be put up as collateral. That is how the British Business Bank draws the line, and it is the only difference in the definition. Everything else follows from it.

The British Business Bank’s glossary describes security as something lenders typically require against a loan, such as premises or plant equipment. If the loan is not repaid, a lender with security has a claim on that asset. A lender without it has to rely on the borrower’s promise to pay, and on what it can recover through the courts.

Because the lender carries less risk when it holds security, lenders often treat secured and unsecured applications differently. Amounts, terms, pricing and paperwork vary from one lender to another, so compare actual offers rather than relying on a general rule.

The table sets out the main differences in plain terms. It describes how the products work, not what any lender will offer you.

You can use any asset the lender is willing to take a charge over, most commonly business premises, plant and equipment, vehicles or other property you own. Each lender decides what it accepts and how it values it.

A lender may also take security over the business’s assets generally. UK insolvency guidance describes a fixed charge as the creditor’s right to recover its capital and interest from definite, ascertainable assets, and a floating charge as one that hovers over a changing pool of assets until something causes it to settle on them. Our guide to what a debenture is explains how both are documented.

Some products are secured by their own nature. Asset finance is backed by the equipment or vehicle being bought, and a commercial mortgage is backed by the property. Lenders often talk about the size of the loan relative to the asset’s value, which our guide to loan to value explains.

A charge is the security a company gives for a loan; Companies House gives a mortgage as an example of a charge. It is a legal right for the lender over the asset, recorded in a document, and it stays in place until the debt is repaid.

For a limited company, a charge must be registered at Companies House. The details must be sent within 21 days, starting the day after the charge is created, and Companies House warns that if it is not registered in time it may be difficult to recover the debt if the company becomes insolvent. Late registration needs a court order. In practice the lender or its solicitor usually handles the filing, but you should know the deadline exists.

Registered charges appear on the company’s public record, which other lenders and suppliers can see. Taking a charge can also affect what is left to offer a second lender, so tell any adviser about existing charges before you apply for more finance.

No. An unsecured business loan means no asset is pledged, but the British Business Bank notes that lenders typically require a personal guarantee as a form of assurance for repayment. That moves the risk from a business asset to you.

A personal guarantee is a legally binding agreement under which a director or owner agrees to be personally liable if the business cannot repay. It can sit alongside a secured loan too. A limited company’s owners are normally responsible for its debts only up to their investment, and a guarantee overrides that protection for the debt covered. Read our guide to personal guarantees for business loans before you sign one.

The main risk of a secured loan is losing the asset, and the main risk of an unsecured loan is personal liability through a guarantee. Both also carry the ordinary risk of any borrowing: the repayments must be met from the business’s cash flow.

• Secured: the lender can claim the charged asset if you default, which could be premises or equipment the business relies on to trade.
• Secured: the asset may be tied up, so selling or refinancing it can need the lender’s consent.
• Unsecured: a personal guarantee can put your own assets, and in some cases your home, at risk.
• Both: fees and early repayment charges may apply, so read the agreement and compare the total cost, not only the headline rate.

If a company does become insolvent, a creditor holding a fixed charge recovers from the proceeds of the charged assets, and other creditors are paid in a statutory order of priority. If repayments are already becoming hard to meet, speak to a licensed insolvency practitioner early rather than waiting.

You choose by weighing which assets you are prepared to put at risk, how much you need to borrow and how long you need it for. There is no single correct answer, and it can be sensible to ask for quotes on both.

• If you own property or equipment and want to borrow a larger amount over a longer period, a secured structure may be worth pricing.
• If you have few assets, or would rather not pledge those you have, an unsecured product may suit better, although a director may be asked to give a guarantee.
• If the business is young, our guide to start up business loans covers how lenders look at a limited trading record.
• If the need is short-term, such as covering a gap before customers pay, a different product may fit better than either.

Compare offers on the total amount repayable, security required, guarantees, fees and what happens if you want to repay early. Our guide to comparing business loan lenders shows what to line up side by side. For each category, the lender directory shows which providers describe themselves as offering secured lending, and the page on unsecured business loans covers the other side.

Government-backed schemes change what a lender may take as security, but not your liability. Under the Growth Guarantee Scheme, lenders can take personal guarantees at their discretion if that is part of their typical practice, but they cannot take your principal private residence as security.

The guarantee under such schemes is given to the lender, not to you. You remain 100% liable for the debt. Our guide to the Growth Guarantee Scheme sets out how it works and who can apply.

Capzy is a credit broker, not a lender, and is paid by the lender. We introduce businesses to lenders that offer both secured and unsecured products and set out what comes back so you can compare it.

You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria. We do not give legal advice, so ask a solicitor to review any charge or guarantee before you sign.