Whether a business loan is secured or unsecured affects the rate you'll pay, how much you can borrow, and what's at risk if repayments aren't kept up. Understanding the difference helps you choose the right option and know what you're agreeing to.

What secured loans involve

A secured loan is backed by an asset, such as property, equipment or other business assets, which the lender can claim if you don't keep up repayments. Because the lender has this security, secured loans often come with lower interest rates and higher borrowing limits than unsecured alternatives, since the lender's risk is reduced by having something to fall back on.

What unsecured loans involve

An unsecured loan doesn't require a specific asset as security, relying instead on your business's creditworthiness and, often, a personal guarantee from a director. Because the lender takes on more risk without security, unsecured loans typically come with higher interest rates and lower borrowing limits, though they're usually quicker to arrange since there's no asset valuation or legal charge to set up.

Weighing up which suits you

A few questions help clarify which option fits your situation better:

•        Do you have suitable assets you're comfortable using as security?

•        How much do you need to borrow, and does that fit within unsecured limits?

•        How quickly do you need the funds, since unsecured loans are often faster?

•        What are you comfortable risking if the business hits difficulty?

What a personal guarantee means

Many unsecured business loans still require a personal guarantee from a director, meaning you're personally responsible for repayment if the business can't pay. This is different from a secured loan against business assets, since it puts your personal finances at risk rather than just business assets. It's worth reading the terms carefully and understanding exactly what you're agreeing to before signing.