Secured vs unsecured business loans: what's the difference?

When you start looking at finance for your limited company, one of the first questions a broker or lender will ask is whether the loan will be secured or unsecured. The two words sound simple, but the difference affects how much you can borrow, how long the paperwork takes, what it costs and, most importantly, what is at risk if the business can't keep up the repayments.

This guide explains both in plain terms so you can have a better conversation with a broker or lender.

What a secured loan is

A secured loan is backed by an asset. The lender takes a legal charge over something of value, and if the loan isn't repaid as agreed, the lender has the right to take and sell that asset to recover what it is owed.

For a limited company, the asset might be:

• commercial property the company owns, such as a unit, shop or office
• a director's home or other residential property, if the director agrees to offer it
• other business assets, depending on the lender and the type of finance

Because the lender has something to fall back on, secured lending can make larger amounts or longer terms possible, and the price can be lower than an equivalent unsecured loan. It doesn't always work out that way, though: every lender sets its own terms based on the whole application.

Secured loans usually take longer to arrange. The lender may want a valuation of the property, solicitors will normally be involved to register the charge, and there can be valuation and legal fees on top of the lender's own fees. Ask for all of these costs in writing before you commit.

What an unsecured loan is

An unsecured loan isn't tied to a specific asset. The lender decides based on the company's trading record, accounts, bank statements and credit history, and lends without taking a charge over property.

Unsecured loans are usually quicker to arrange because there's no valuation or legal charge to register. The trade-off is that lenders take more risk, so amounts and terms can be more limited and the cost can be higher.

"Unsecured" rarely means "no personal risk"

This is the point many directors miss. When a lender makes an unsecured loan to a limited company, it will very often ask one or more directors to sign a personal guarantee.

A personal guarantee is a promise that, if the company can't repay, the director will pay personally. It isn't a charge over your home, but if a guarantee is called in and you can't pay, the lender can pursue you personally for the debt, which in the worst case could put personal assets at risk.

Before signing a personal guarantee, check:

• How much it covers. Some guarantees are capped at a set amount; others cover the whole debt plus costs and interest.
• Whether it's joint and several. If several directors sign, the lender may be able to claim the full amount from any one of them.
• How long it lasts and whether it ends when the loan is repaid.
• Whether you should take independent legal advice. Many lenders recommend it, and it's sensible either way.

The main differences side by side

	Secured	Unsecured
Backed by	A charge over property or another asset	No specific asset, but often a director's personal guarantee
Paperwork	Valuation and legal work are common	Usually lighter
Time to arrange	Usually longer	Usually shorter
Extra costs	Valuation and legal fees are common	Fewer third-party costs
What's at risk	The asset used as security, plus any guarantee	The company, and the director personally under any guarantee

Using a director's home as security

Some secured business lending uses a director's home. If you're asked to do this, treat it as one of the biggest financial decisions you'll make. If the company can't repay, your home could be at risk. Talk to everyone who lives there and owns a share in it, and take independent legal advice before you sign anything. You can always say no and ask what other options exist.

Which one suits your company?

There's no single right answer. A few questions can help you think it through:

1. How much do you need, and for how long? Larger sums over longer periods can be easier to arrange with security.
2. How quickly do you need it? If timing matters, the extra steps of a secured loan may not suit.
3. What are you willing to put at risk? Be honest about how you'd feel if things went wrong.
4. What will the finance pay for? Some purposes, such as buying vehicles or equipment, have their own types of finance where the item itself is the security.

Questions to ask any broker or lender

• What is the total amount I'll repay, including all fees?
• Are there arrangement, valuation, legal or broker fees, and when are they paid?
• Can I repay early, and is there a charge for doing so?
• What happens if I miss a payment?
• What security and guarantees will you need, and from whom?

A good broker will answer these clearly and put the key terms in writing.

How LendFinder can help

LendFinder is an introducer, not a lender or broker. We only work with UK limited companies. You tell us what your company needs, and we introduce you to a partner broker whose lenders suit a business like yours. Our partners may pay us a fee for the introduction; you don't pay us anything.

Any finance is subject to status and the lender's own checks, and there's no obligation to accept an offer. If you'd like to see what might be available, you can start an enquiry. It takes about a minute.