Secured vs unsecured business loans: what is the difference?

The lender takes security over an asset, commonly commercial or residential property, equipment, vehicles or receivables. If the loan is not repaid, the lender can recover its money from that asset. Because the lender carries less risk, secured finance generally supports larger amounts, longer terms and sharper pricing.

No specific asset is pledged. The lender assesses the business on its trading history, turnover, bank statements and the strength of its cash flow. Many unsecured lenders still ask for a director's guarantee. Approval can be fast, in some cases within days, but pricing is usually higher and limits are lower than for secured finance.

The trade-offs usually fall like this, though every lender sets its own criteria.

• Amount: secured generally supports larger facilities
• Cost: secured is generally cheaper because the lender has recourse to an asset
• Speed: unsecured is generally faster because there is no valuation or security documentation
• Risk to you: secured puts the pledged asset on the line, unsecured usually relies on a personal guarantee instead

Start with the purpose and the size of the need. Short-term working capital or a quick opportunity often suits unsecured. A large purchase, acquisition or long-term refinance often suits secured. If you have an asset you are willing to use, ask for quotes on both, because the saving on a secured facility can be significant on larger amounts.