Secured vs unsecured business loans: what's the difference?

With a secured loan, the lender takes a charge over some or all of the company's assets and registers it at Companies House. The loan size is linked to the value of the security and the company's ability to repay. Common forms include:

• Debenture: a document giving the lender charges over the company's assets as a whole, usually combining fixed and floating charges.
• Fixed charge: attaches to specific assets, such as machinery or vehicles (charges over property are outside the finance we arrange). The company cannot normally sell those assets without the lender's consent.
• Floating charge: covers assets that change from day to day, such as stock and debtors. The company can trade with them normally unless the charge crystallises, for example on default or insolvency.
• Ranking: where more than one lender holds security, the order of priority matters, and a new lender may need consent from an existing one.

Secured lenders often ask for personal guarantees from directors too, so security over company assets does not always remove personal exposure. Welcome Finance arranges finance secured on business assets such as equipment, vehicles, debtors and stock, or through a debenture. We do not arrange property finance, commercial mortgages or anything secured on a home.

An unsecured loan is approved mainly on the company's trading, cash flow and credit history. There is no charge over company assets. However, most lenders ask directors to give a personal guarantee, meaning directors can be pursued personally if the business defaults. If a guarantor owns property, a lender could in some circumstances seek a charge over it after obtaining a judgment.

• Security: secured loans need business assets such as a debenture or fixed charge; unsecured loans rely on business performance and usually a personal guarantee.
• Amounts: secured loans can go much higher, linked to asset value; unsecured amounts are usually linked to turnover.
• Terms: secured loans can run for many years; unsecured loans are typically shorter.
• Cost: security reduces the lender's risk, so pricing can be lower, although valuation and legal fees add upfront costs.
• Speed: unsecured loans can be decided within days; secured loans need valuations and legal work, which take longer.
• Eligibility: security can help businesses with limited history or imperfect credit; unsecured lenders focus heavily on trading and credit.
• Risk: with secured loans, the asset is at risk; with unsecured loans, the guarantor's personal finances may be at risk.

• You need a larger sum than unsecured lenders will consider.
• You want longer terms to keep monthly repayments lower.
• Your company owns valuable business assets, such as equipment, vehicles or a strong debtor book, and you are comfortable charging them.
• Your credit history or trading record would limit unsecured options.

• You need a smaller sum quickly.
• The company has few assets to offer, or you prefer not to charge them.
• Your business has solid turnover, clean bank statements and good credit.
• The purpose is short term, such as stock, a campaign or a seasonal gap.

When comparing, look past the headline rate. Secured loans often involve a valuation fee, legal fees for both sides and sometimes a higher arrangement fee, and early repayment charges can apply on longer fixed terms. Unsecured loans usually have fewer upfront costs but may carry higher pricing and shorter terms, which means larger monthly payments. The fairest comparison is the total amount repayable, including fees, over the period you actually expect to borrow for.

Some finance sits between secured and unsecured. Asset finance is secured on the equipment being bought, not on property. Invoice finance is secured on your debtor book. A merchant cash advance is repaid from card takings. These can offer more funding than a pure unsecured loan without a charge over all of the company's assets.

1. What exactly is being used as security, and what happens if I cannot pay?
2. Is a personal guarantee needed as well as security, and is it capped?
3. What are the total costs, including valuation, legal and arrangement fees?
4. Are there early repayment charges?
5. How long will the process take?

Neither may be right if the business cannot comfortably afford the repayments from its own cash flow, or if the borrowing would only cover ongoing losses. Security and guarantees do not make an unaffordable loan safer; they only change who loses if it goes wrong.

Welcome Finance is a commercial finance broker for limited companies, LLPs and partnerships of four or more partners. We compare secured and unsecured options side by side, including what security and guarantees each lender wants. Before giving security or a guarantee, consider taking independent legal advice. Check your eligibility in 60 seconds; it will not affect your credit score.