Secured and unsecured loans: UK business guide

When a business borrows money, lenders need to know they'll be repaid. How they get that confidence is what separates secured from unsecured loans. In short, secured loans use some kind of asset or capital to offset risk for the lender, while unsecured loans will use your business history, often in conjunction with a personal guarantee. 

Understanding the difference helps you choose the right type of borrowing for your business, and know what you're committing to before you sign.

What is a secured loan?

A secured business loan is one that's backed by collateral - an asset the lender can claim if you don’t repay the debt. For businesses, that might be commercial property, equipment, vehicles or stock.

This means that if your business defaults on the loan, the lender has a legal right to sell the asset used as security to recover what they're owed. That's a big commitment, so it's important to be clear on exactly what's being secured before agreeing to a loan.

Because the lender's risk is reduced by the presence of collateral, secured loans tend to come with lower interest rates and can support larger borrowing amounts. They're often suited to long-term investment like funding a property purchase, a fleet of vehicles or substantial equipment.

How does a secured loan work?

When you apply, the lender will assess your business's financial health alongside the value of the asset you’re offering. They typically lend a percentage of that asset's total value, which is known as the loan-to-value (LTV) ratio.

Once the loan is approved, the lender registers a legal "charge" against the asset to secure their interest. You then receive the funds and make regular repayments over an agreed term. While the loan is active, you can usually continue using the asset in your day-to-day operations, such as driving the vehicles or operating the machinery. As soon as the loan and any associated interest are fully repaid, the lender removes the charge, leaving the asset completely unconstrained.

What is an unsecured loan?

An unsecured business loan doesn't need you to put up specific assets as security. Instead, the lender looks at your creditworthiness - your business's financial history, trading performance, turnover and credit score - to decide whether to lend and at what rate. Note – this is not an exhaustive list, and specific lending criteria will vary depending on the lender.

Just because there’s no collateral it doesn't mean there's no risk to you as a borrower. Some lenders might still need a personal guarantee, which is a commitment that, if the business can't repay, you'll cover the debt personally.

Unsecured loans tend to be quicker to arrange than secured ones and don't need a formal asset valuation. They're often a better fit for businesses that need funds more quickly or don't have assets to offer as security.

Key differences between secured and unsecured loans

Secured loans need a specific asset to be used as collateral. For businesses funding equipment or vehicles, asset finance uses the asset itself as collateral - a slightly different structure to a traditional secured loan, but the same underlying principle. Unsecured loans don’t have this requirement, though a personal guarantee may still apply.

Some businesses may use both over their lifetime – they come in handy for different use cases since they have different advantages and disadvantages.

• Interest rates: Because the lender takes on more risk with an unsecured loan, interest rates are usually higher than for secured borrowing. This can make a big difference, especially for larger amounts or longer terms.
  
  

• Loan volumes: Secured loans can generally support larger borrowing because the lender has an asset to fall back on. Unsecured loans tend to have lower upper limits, though this varies by lender and the strength of the business's financials.
  
  

• Loan terms: Secured loans often come with longer repayment terms too,  particularly where larger amounts are involved. Unsecured loans tend to have shorter terms, making them better suited to medium-term needs rather than long-term investment.

Secured vs unsecured loans summary

The table below summarises the key differences between secured and unsecured loans for businesses:

Which type of loan is right for your business?

There's no universal answer. It depends on what you're borrowing for, how quickly you need the funds and what your business has available in the way of assets and financial history.

If you have assets to offer as security, a secured loan may give you access to a larger amount at a lower rate. If you need funds quickly or don't want to commit assets, an unsecured loan is worth exploring.

Funding Circle offers unsecured small business loans with no need to provide collateral - a straightforward option for established businesses looking to fund growth, manage cash flow or invest in their next step.

FAQs

What is an unsecured loan?

An unsecured loan is a type of borrowing where no specific collateral is required. The lender assesses your creditworthiness rather than securing the loan against an asset. Some lenders might still need a personal guarantee even for unsecured products, so it's important to check the full terms before agreeing.

Can I get a secured business loan without property?

Yes. While property is one form of collateral, it's not the only one. Secured business loans can be backed by other assets including commercial vehicles, manufacturing equipment or stock. The type of collateral accepted varies by lender.

Are Funding Circle loans secured or unsecured?

Funding Circle business loans are unsecured - you don't need to provide collateral to apply – however, most borrowers will need to provide a personal guarantee. Eligibility is based on your business's financial position and trading history. You can check your eligibility and get a decision in as little as an hour.

16/06/26: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.