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Secured or Unsecured: Which business loan is best?

5 July, 2019

Before we start to explore the differences between these two business funding options, it is vital that you first ask a more important question, which is…

Secured or unsecured: which is best for my business?

Simply put, an unsecured business loan is finance that does not require collateral. These types of loans usually come with higher interest rates due to the nature of the product, but of course, they also come with the peace of mind that your collateral, such as property and other assets, is not exposed.  

Whereas a secured business loan is a form of borrowing that uses an asset, such as property or machinery, as leverage to secure the finance required.

Both types of loan are fantastic in their own way, but there is no universal solution when it comes to business funding. What works for your neighbouring business will not necessarily be the best option for yours, which is why is it imperative that you explore your options and educate yourself on the different products available to your businesses. 

Additionally, you might find that your business is only able to access one type of loan as it does not meet the criteria for the other. For example, you might find that lenders are not willing to accept your application for an unsecured business loan as you have a poor credit rating - so in order to get the funding you require, you may well be asked to secure your loan against property or valuable assets.

Any responsible lender will exercise due diligence before going ahead and lending to a business. This is essential as lenders will need to ascertain what your realistic affordability is in order to pay back the loan and on what terms.

The team at Nucleus understand that borrowing large amounts of money can be accompanied by feelings of anxiety and stress, which is why we have dedicated account managers to help you every step of the way. We believe that with the right mindset and plenty of information, a commercial loan can be extremely useful for businesses wanting to achieve their aspirations sooner rather than later.

That leaves just one important step, which is to talk about the differences between a secured and unsecured loan – and the benefits that each product can bring to your growing business.

 

Why a Secured Loan is Best for Your Business?

A secured business loan is a hugely viable option for many businesses, especially start-ups or those who don’t meet the standard lending criteria. There are multiple reasons why a business may decide that a secured loan is the right fit, some of which include:

  • Access larger loan amounts - when you leverage a business loan against an asset, such as a residential or commercial property, the risk to the lender is significantly decreased. With the added security, lenders feel comfortable lending larger amounts, so if your business requires a substantial amount to meet growth targets, a secured loan is likely the most suitable option.
  • Longer repayment terms – the repayment periods on secured loans are usually far lengthier than those on unsecured loans. With our Property Finance product, businesses have up to 7 years to pay back their loan and the funding can be used for any business purpose.
  • Interest rates are significantly lower – with longer repayment terms, your business is also likely to get access to better interest rates. For businesses that are concerned about making the best money management decision, a secured loan is often recommended.
  • Suitable for businesses with a less than perfect credit history – if your credit history is less than favourable or you are currently rebuilding credit, your chances of acquiring business funding are far higher if you opt to apply for a secured loan. 
  • Secured loans have the added benefit of enabling a borrower to build their credit score, so if your credit history has taken a hit in previous years, a secured commercial loan could help to rebuild it

 Why an Unsecured Loan is Best for Your Business?

  • Faster to obtain – since there are no asset valuations involved, an unsecured loan is usually the faster option. Unsecured loans tend to be smaller amounts of funding too, which means they generally get approved much quicker.
  • Low property exposure – if you are concerned about using your residential or commercial property as collateral, an unsecured loan is one way to avoid this risk.
  • Great for businesses wanting to borrow small amounts – if you require a business loan but have no need to borrow a large sum of money, an unsecured commercial loan could be the perfect option. For businesses wanting to borrow even less, our Business Cash Advance (BCA) can enable you to borrow amounts from £3k based on your monthly card takings.
  • Shorter repayment terms – your business might have identified a need for funding on a more short-term basis but been put off by the lengthy repayment terms. If so, our Cash Flow Finance is ideal for businesses that need a small, unsecured commercial loan starting from £25k to fill a financial gap.
  • More flexibility – seasonality means that some businesses thrive at certain points of the year, then face much slower months during later periods. If you want to acquire business funding but are worried about the impact of fixed monthly repayments, our BCA product will accommodate the need for flexibility to handle the challenges caused by seasonality.

Where to Apply for a Secured or Unsecured Business Loan?

So, you have decided that you want to go ahead and apply for a commercial loan to enable your business to grow, but you aren’t sure which provider is best.

There are various routes that you can explore in order to access business credit. But simply put, you have the choice of approaching traditional providers, such as mainstream banks - or alternative lenders, who have established themselves as an important lifeline amongst UK SMEs in recent years.

Banks – The Traditional Approach

Despite the fact that alternative finance is a vital resource for UK SMEs, the majority of business owners will still first turn to their bank to get the funding they need. Unfortunately, there is still taboo associated with borrowing money and so when businesses finally decide to reach out, they often feel that banks are the safest – and sometimes, only choice.

But banks are not lending to businesses as much as they used to and their criteria for doing so has tightened and become a lot more stringent in recent years. After the banking crisis a decade ago, banking regulations became a lot stricter and as a result, so did their criteria. This has meant that businesses that are not properly established struggle to qualify for funding, especially SMEs and start-ups.

Research suggests that over half of UK SMEs approach their main bank when they first identify the need for funding. Rather than shopping around and finding the best option for their individual needs, 50% of first-time borrowers approach their bank and have their application rejected – and 37% of those businesses give up on accessing funding altogether. It has become evident in recent years that the continued rejections from banks has significantly stunted SME growth, which is exactly why alternative lenders grew in popularity.

The Spectacular Rise of Alternative Lenders

Following the financial crisis, a funding gap started to emerge, and SMEs were the ones who felt the impact most. The rigorous requirements from banks often mean that SMEs and start-ups are denied the business funding they desperately need to thrive.

In fact, The British Business Bank estimates that banks reject 100,000 funding applications from small businesses every year, which is why it is so important that businesses educate themselves on what other options they have available to them.

It appears that businesses are moving away from the idea that their main bank is the only possibility of accessing business credit.  According to data compiled by the Cambridge Centre for Alternative Finance, the market in the UK grew by a huge 35% in 2017 and continued growth looks likely – for both the alternative lending market and SMEs.

Alternative Lenders are Faster

Alternative lenders realise that business funding is not always black and white. Due to the crisis banks faced over a decade ago, the funding requirements are usually far too strict for growing SMEs and emerging start-ups. The banks were forced into imposing its tightest control in lending in over a decade, whereas Nucleus aims to assess all loan applications based entirely on their merit.

Another major obstacle for businesses needing funding is that often, loan applications are left until they are desperately needed to continue day-to-day business operations. In these instances, funding needs to be almost immediate.

Unlike traditional banks, alternative lenders can usually give same day decisions and even provide funding within 24 hours if a fully packaged application is received. Banks have a much lengthier application process and your business could be waiting months for an answer, only to hear a resounding ‘no’. 

With this said, Nucleus always encourage businesses to explore their credit options from a position of strength, rather than leaving it until it becomes a necessity. Commercial loans are certainly no longer frowned upon and in fact, it is the businesses that realise that additional working capital enables them to thrive that are the ones who tend to flourish most. 

I’m a Start-up – Which loan is Best for My Business?

The British Business Bank found that rejection rates for start-ups seeking new loans currently exceed 50%. It has become evident that in recent years, funding for start-ups needs to be more readily accessible. A lot of business funding products are not suitable for brand new ventures, which means that lots of potential business concepts are never able to successfully launch.

However, the market for start-up funding has been steadily growing over the years and a secured business loan is a great route to explore if your business needs working capital to get it off the ground.

Property finance is a popular product that is accessed by thousands of businesses every year. It is an ideal funding option for SMEs that do not necessarily fit the standard lending criteria or who are a start-up venture that cannot demonstrate profitability initially.

At Nucleus, we understand that finding the right credit for your growing business can be a challenge. When accessing finance for your start-up or even your more established business, it is essential that you are well educated on the topic so that you are able to make the most suitable decision regarding how to fund its growth.

To find out more information about the various secured and unsecured loans we offer, get in touch with our team today for a consultation.

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