Secured vs. unsecured business loans: Whatʼs the difference?

When youʼre researching business loans to fund growth, equipment purchases, or cash flow needs, youʼll quickly come across two main categories: secured business loans and unsecured business loans. The difference between them fundamentally affects how much you can borrow, what youʼll pay in interest, and crucially, what youʼre putting at risk if things donʼt go according to plan.

A quarter of all businesses using finance put up some kind of security against their loan. Understanding loan security matters because it can directly impact your businessʼs financial future and your personal peace of mind. A wrong choice could mean paying thousands more in interest than necessary, or conversely, putting valuable assets on the line when you didnʼt need to. Knowing how secured business loans and unsecured business loans work helps you make the decision thatʼs right for your circumstances, not just what the first lender offers you.

In this article, weʼll explain how these types of loans differ, look at the pros and cons of each, and consider which might be more suitable for small businesses.

Key points:

• Secured business loans offer lower interest rates if you can provide an asset as security to reduce the lenderʼs risk

• With unsecured business loans, you donʼt have to risk a business asset, but interest rates are higher and loan amounts smaller

• Funding Options by Tide can help when optimisation of working capital isnʼt enough, offering access to business finance up to £20 million

What is a secured loan?

A secured loan is simply a loan thatʼs backed by something valuable you own, which lenders call collateral. Essentially, youʼre offering a safety net to the lender. If you canʼt make your repayments, they have the legal right to take and sell that asset to recover what you owe them.

The collateral could be your business premises, equipment, vehicles, or even your home if youʼre a sole trader or director willing to provide a personal guarantee. For a £50,000 loan secured with a commercial property as collateral, the lender knows they have a tangible asset worth significantly more than the loan amount. That security makes them more comfortable lending to you.

Because the lenderʼs risk is lower, it means they generally feel more confident in offering larger loan amounts, longer repayment terms, and more competitive interest rates, often ranging from 4-12% APR depending on your circumstances and the strength of your collateral.

The deal youʼre making is straightforward: you get better loan terms, but youʼre putting a valuable asset on the line. Those more favourable terms reflect your own risk: if your business faces difficulties and you canʼt keep up with payments, you could lose whatever youʼve used as security. 

What is an unsecured loan?

An unsecured loan doesnʼt require you to put up any collateral, so no property, equipment, or other assets backing the agreement. Having considered your businessʼs financial track record and creditworthiness,  the lender is essentially trusting that youʼll repay what you borrow. 

Without that safety net of collateral, lenders naturally see unsecured loans as riskier. Theyʼre relying purely on your businessʼs ability to generate enough cash flow to meet the repayments. This typically means theyʼll want to see strong financials, good credit scores, and often a solid trading history before they consider lending to you. Other short-term options like business cash advance products can also be worth considering for immediate funding needs.

Because the lenderʼs risk is higher, unsecured business loans usually come with stricter terms. Interest rates are higher, often ranging from 8-30% APR depending on your business profile, loan amounts are smaller (typically £1,000 to £500,000), and there are shorter repayment periods. A £25,000 unsecured loan might need to be repaid over two to five years rather than the longer terms youʼd get with security.

The advantage of unsecured loans is that you donʼt have to risk your assets. If your business faces difficulties and you canʼt meet the repayments, the lender canʼt seize your property or equipment. They might pursue other recovery methods, but your collateral isnʼt at immediate risk because there isnʼt any.

Benefits and drawbacks of secured and unsecured loans

Both these types of business loans have their plus points, depending on your needs.

Secured loans

The main advantage of secured loans is getting more for less. Youʼll typically access larger loan amounts - sometimes up to several million pounds - at lower interest rates and with longer repayment periods. A manufacturing business needing £200,000 for new machinery might secure this against their factory premises at 6% APR over ten years, keeping monthly payments manageable.

The downside is your assets are vulnerable. For example, if that same manufacturer experiences a downturn in business like losing their biggest client, it could lead to struggles with repayments, with the eventual consequence being they could lose their premises. Itʼs also worth noting that secured loans often involve more paperwork and property valuations, which can slow down the application process by several weeks.

Unsecured loans

For those with less appetite for risk, unsecured loans offer peace of mind above all else. Your assets stay protected no matter what happens to your business. A freelance marketing consultant borrowing £15,000 to upgrade their home office setup doesnʼt risk losing their house if a major project falls through and cash flow gets tight.

However, that security could come at a cost. Youʼll generally pay higher interest rates, access smaller amounts, and face stricter eligibility criteria. The same consultant might pay 18% APR and need to repay the loan within three years, rather than the lower rates and longer terms theyʼd get with security.

Which suits small businesses best?

You may not be surprised to hear that it depends entirely on your specific circumstances, such as how old your business is, what assets you own, how much you need to borrow, and how comfortable you are with risk. As small businesses span everything from tech startups operating from kitchen tables to established trades with workshops full of equipment, thereʼs no one-size-fits-all answer.

Generally though, many newer small businesses find themselves naturally drawn to unsecured small business loans. If youʼre a graphic designer whoʼs been trading for 18 months, you might not own business premises or expensive equipment to use as collateral. An unsecured loan for £8,000 to invest in better software and marketing might make perfect sense, even at 15% APR, because youʼre not risking losing your home or livelihood. 

Established small businesses with valuable assets often lean toward secured loans, particularly for larger investments. A family-run bakery that owns their shop premises and wants £75,000 to expand into catering might find the secured route feels more comfortable – perhaps 7% APR over eight years rather than 20% APR over four years. That lower monthly payment could be the difference between comfortable growth and financial strain. Businesses with poor credit history also sometimes feel they need to take the secured route to secure a loan.

Your risk tolerance plays a huge part too. Some business owners sleep better at night knowing their assets are protected, even if it means paying more in interest. Others are comfortable using their property or equipment as collateral if it means getting better terms for growth opportunities. 

Find business finance with Funding Options by Tide

Whether youʼre looking for a standard business loan, a short-term business loan, or something a little more specialist, like auction finance for property developers, weʼre one of the leading names in business finance in the UK, having helped facilitate over £1 billion in finance to more than 20,000 customers.

Checking if youʼre eligible is free, only takes a few minutes, and while a full application would impact your personal or business credit score, checking eligibility wonʼt. Just submit your details via the link below to find out if you could be eligible to borrow up to £20 million.

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FAQ

Can I get a secured loan if I donʼt own business premises?

Yes, you can. While commercial property is commonly used as collateral, lenders accept other assets too, such as business equipment, vehicles or machinery. Some sole traders and company directors also use their personal property as security, though this obviously increases your personal risk.

How quickly can I get an unsecured business loan?

Unsecured loans are generally faster because thereʼs no property valuation needed. Depending on the lender and how straightforward your application is, you might receive funds within a few days to a couple of weeks. Secured loans typically take longer due to valuations and legal work.

What happens if I canʼt repay a secured loan?

It's always better to speak to your lender if you think you're going to have trouble making your repayments as they can offer options like restructuring the debt. However, if you don't pay back what you owe, they have the legal right to repossess and sell the asset you used as collateral to get their money back.

Can startups get secured business loans?

Itʼs challenging but not impossible. Most lenders prefer to see some trading history ᠆ often at least two years ᠆ before offering secured loans. However, if you have valuable assets to use as collateral and a solid business plan, some lenders might consider newer businesses.

Are interest rates on unsecured loans negotiable?

Thereʼs usually some room for negotiation, particularly if you have  a strong financial record, good credit history, or existing relationships with the lender. That said, unsecured loans will always carry higher rates than secured options due to the increased risk to the lender.

What credit score do I need for an unsecured business loan?

Thereʼs no universal minimum, as each lender sets their own criteria. Generally though, youʼll have better chances with a score above 700. Some specialist lenders work with businesses that have lower scores, but expect higher interest rates and stricter terms.

Can I switch from an unsecured to a secured loan later?

Possibly, though youʼd typically need to apply for a new secured loan and use those funds to pay off your existing unsecured loan. This might make sense if youʼve acquired assets since your original loan and want to access better rates, but factor in any early repayment charges.

Do secured loans always offer lower interest rates than unsecured ones?

Generally yes, but not always. Your specific rate depends on factors like your credit history, business performance, the value of your collateral, and current market conditions. A business with excellent credit might get competitive unsecured rates that rival secured options for smaller amounts.

What assets canʼt be used as collateral for secured loans?

Lenders typically wonʼt accept assets that lose their value quickly, are difficult to value, or would be hard to sell. This often includes perishable stock, outdated equipment, or assets with unclear ownership. They want collateral that holds stable value and could realistically be sold if needed.

Is a directorʼs personal guarantee the same as a secured loan?

Not quite. A personal guarantee means youʼre personally liable for the debt if your business canʼt repay it, but it doesnʼt automatically put specific assets at risk. A secured loan explicitly ties the debt to particular assets. However, lenders can pursue your personal assets if youʼve given a guarantee and the business can't pay.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

Itʼs important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicantsʼ circumstances and creditworthiness. Funding Options will receive a commission or finderʼs fee for effecting such finance introductions.