Realising that you need a loan is the just the first step in securing funding for your business.
You’ve now got to make the decision on whether you would prefer to opt for a secured loan or an unsecured loan.
What is a secured loan?
A secured loan is linked to a form of security provided by the borrower, the security is usually in the form of property, but can be any asset that you own that has a value.
This type of loan will normally use to borrow anything over £5,000, but the actual amount you can borrow and the duration of the terms you can borrow it over will depend on your business /personal circumstances, and the amount of equity that you have in your security.
You may be able to access much larger amounts on a secured loan than on an unsecured loan, as you are offering a security to the funder to protect their own risk.
As you are offering this security, you may find that you have a higher chance of qualifying for a secured loan rather than an unsecured loan.
The repayment terms of a secured loan also tend to be for a longer period and tend to be fixed monthly payments, meaning it should be easy to manage the debt.
What are the disadvantages of a secured loan?
Please be aware that if you are providing security for a business loan then you potentially risk losing that security in the event of default.
You will also need to check the terms and conditions of the loan in order to understand whether you could be liable for any other charges such as early repayment penalties, as they could increase the cost of your borrowing.
What about an unsecured loan?
Also known as a signature loan, an unsecured loan will be subject to your credit rating. It is possible to borrow up to £350,000 in some circumstances.
These loans are perfect for businesses that don’t own many assets or property, or for those that would rather not offer any security.
This type of loan also gives you the flexibility of being able to decide on how long you would prefer to repay, with the most common choice being between one and five years.
As there is no security needed for an unsecured loan, your trading history will play an integral part in your application so if your business has suffered with credit problems in the past, it may hinder the chances of getting the loan approved.
Will I be asked to guarantee the loan?
If the company does not have adequate strength in the balance sheet it is typical for a lender to request a personal guarantee from the directors of the company. A director’s guarantee will provide additional security to the lender and therefore reduce the level of risk the lender associates with the loan.
When providing a personal guarantee, a business director agrees to act as a guarantor for the debt.
If the business were to then default on a payment, the individual who is acting as guarantor will be responsible for the company’s debt in regard to the loan
The guarantor should read the contract thoroughly before agreeing to it and also, they should seek independent legal advice.
What are the disadvantages of an unsecured loan?
As there is more of a risk involved in an unsecured loan, there may be a higher interest rate when compared to that of a secured business loan.
For any further information on both secured and unsecured loans, contact our specialists on 0333 444 0221 or email firstname.lastname@example.org.