Secured or unsecured business loan: which is right for you

Most funding enquiries start with a figure and a deadline. The question worth answering first is whether you want a secured or an unsecured facility, because that one choice drives the amount you can raise, the term you get, the price you pay and the volume of paperwork. Decide it early and the process is short. Decide it late and you can spend weeks on a route that was never going to fit the business.

We are an independent commercial finance broker and we compare 50+ lenders across both routes. This is how the two actually differ in practice, without the marketing gloss.

What security actually means in practice

Security is a legal right over something the business or its owners already own, which a lender can rely on if the loan is not repaid. It does not hand the lender ownership on day one and it does not allow anyone to seize an asset because a payment arrived late. What it creates is a documented claim, ranked against other creditors, that can be enforced if the facility goes into default and cannot be put right.

Three terms do most of the heavy lifting:

• Legal charge. Registered against a named property. A first charge ranks ahead of all other claims on that property. A second charge sits behind an existing mortgage and is only paid once the first charge lender has been cleared, which is why second charge money is priced higher.
• Debenture. A charge over company assets rather than one named property. It can be fixed over identified items such as a machine or a piece of plant, and floating over assets that change daily such as stock and debtors.
• Priority. Where each lender sits in the queue. Two funders can hold security over the same company and still face very different outcomes, which is why ranking and consent get negotiated at the outset rather than at the end.

One thing security never does is replace affordability. A lender taking a charge over a building still wants to see that the loan can be repaid out of trading, because enforcing security is slow, costly and the last thing a commercial lender wants to do. If the repayments do not fit the numbers, strong security will improve the terms on offer but it will rarely rescue a declined case.

What can be used as security

More assets qualify than most owners expect. The usual candidates are:

• Property. Trading premises, a commercial investment, land or a residential buy to let held in the company. A director's own home can be used, though that is a serious step and should be treated as one.
• Plant, machinery and vehicles. Identifiable, serial numbered and resaleable kit supports both asset finance and refinance of assets you already own outright.
• The debtor book. Unpaid sales invoices to other businesses support invoice finance, where the funding line grows as the ledger grows.
• Stock. Usually supporting rather than standalone, and valued conservatively because resale values in a distressed sale are a fraction of cost.
• A cash deposit or blocked account. Common on trade and import facilities.
• A debenture. Taken across the company as a whole, often alongside one of the above.

What matters is not the headline value but the available equity, which is the value a surveyor will stand behind minus whatever is already secured against it. Lenders then advance a percentage of value, not a percentage of your equity, so a property worth £800,000 with £400,000 outstanding does not produce £400,000 of new money.

What changes in rate, term and size

These are typical shapes rather than promises, and every lender sets its own appetite.

• Unsecured. Typically £10,000 to £500,000, occasionally higher for established businesses with strong filed accounts. Terms usually run from 3 months to 5 years. Repayments can be monthly, weekly or daily depending on the product. Pricing is higher because recovery depends on the covenant rather than an asset. Decisions are often made in 24 to 72 hours and funds can land inside a week.
• Secured. Typically £25,000 upwards and into the millions where the asset supports it. Terms stretch from 1 year to 25 years on property. Pricing is materially lower, sometimes less than half the unsecured equivalent. There are extra costs up front, normally a valuation fee and both sides' legal fees, and the process runs in weeks rather than days.

The reason for the price gap is simple. A lender prices for what it expects to lose when things go wrong, not for what it hopes will happen. A charge over a tangible asset reduces that expected loss, so the rate falls. Remove the asset and the rate has to carry the risk on its own.

Speed decides more cases than price. If the need is a VAT bill due in ten days, a cheaper secured facility that completes in eight weeks is not an option, and the honest comparison is between an unsecured loan now and doing nothing.

Personal guarantees and what a guarantee really exposes

A personal guarantee is not security over a specific asset. It is a personal promise that if the company does not pay, you will. On unsecured lending to limited companies it is close to standard, often combined with a debenture, and it is the point in the paperwork that deserves the most attention.

• Capped or unlimited. A capped guarantee limits exposure to a stated figure, sometimes a share of the facility. An unlimited guarantee can extend to the full balance plus interest and recovery costs. The cap is negotiable far more often than people assume.
• Joint and several. Where several directors sign, the lender can pursue any one of them for the whole amount and leave them to sort it out between themselves. If one shareholder has the assets and the others do not, that matters.
• Supported or unsupported. An unsupported guarantee is a claim against you personally. A supported guarantee is backed by a charge over a named asset such as your home, which is a different order of risk.
• Insurance exists. Personal guarantee insurance can cover a proportion of the exposure for an annual premium. It is not right for everyone but it is worth pricing before you sign.

Limited liability protects you as a shareholder. It does not protect you as a guarantor. That is the trade off being made in exchange for borrowing without an asset.

How lenders decide, and a plain decision guide

Underwriting on both routes looks at affordability first: profit before interest and tax against total debt service, the trend across filed and management accounts, bank conduct over the last 6 months, sector appetite, trading history, how much short term debt already sits in the business and the credit profile of the company and its directors. Security changes the margin for error on all of this rather than removing the test. A decline from your own bank is a single lender's view, not a verdict on the business.

As a rough guide by situation:

• Need under £250,000 and speed matters. Unsecured, with a guarantee, almost always wins.
• Raising £250,000 or more against a building you own. Secured, every time. The rate and term saving over 10 or 15 years dwarfs the valuation and legal costs.
• Funding a long life asset such as a machine, truck or fit out. Asset finance secured on the item itself, matched to its useful life.
• Cash tied up in slow paying trade customers. Invoice finance against the ledger, which scales with sales instead of becoming a fixed monthly commitment.
• A tax bill or a short gap before a known receipt. A short unsecured facility sized to the gap, not a 5 year loan for a 3 month problem.
• Several expensive short term facilities running at once. Consolidate into one secured, amortising loan to cut the monthly outgoing.
• Trading under 12 months with no assets. Expect limited options and plan around turnover based funding until there is a filed set of accounts to work with.

Getting indicative terms from us involves no credit check. A full credit search on the company and its directors happens later in the process, before any formal offer is issued, and we will tell you before that point is reached. We are an independent commercial finance broker and we are not FCA authorised. Commercial lending to limited companies sits outside FCA regulation, so these facilities do not carry consumer credit protections, which is worth knowing before you sign anything.

Common questions

Can I get an unsecured business loan without a personal guarantee?

It is possible but uncommon, and usually reserved for established limited companies with several years of filed accounts, consistent profitability and a strong balance sheet. More often the practical win is negotiating a capped guarantee rather than removing it altogether.

Will looking at options affect my credit file?

An indicative quote does not involve a credit check. A full search is run later, once you have chosen a route and want a formal decision. Putting the same case in front of a long list of lenders yourself is what causes damage, because each one may search you.

How much can we borrow against our commercial property?

Typically up to around 70 to 75 per cent of value for owner occupied premises, less on specialist or trade related buildings where a valuer may report on a vacant possession basis. The figure that matters is the valuer's, not the estate agent's, and any existing mortgage comes off the top.