Security & Personal Guarantees

Security and guarantees are important factors for many business loans, and there's a wide variety of items you can use as security

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All business loans fall into one of two categories; secured and unsecured. For a secured business loan you will need to offer security, while for an unsecured business loan lenders will typically require a personal guarantee.

Security and secured business loans

Secured business loans get their name because they require 'security' — in other words, a valuable asset that you own which can be sold if you can't repay the loan. Because the loan is based on a tangible, valuable item, secured loans can often be easier to get than unsecured lonas.

There are many assets that can be used as a security for a secured business loan, including:

  • Commercial property
  • Vehicles
  • Plant and machinery
  • Stock

What is considered an acceptable asset varies from lender to lender, and some will prefer specific types of asset such as property. But generally speaking, if you have one of the above available, you could be eligible for a secured business loan.

Personal guarantees and unsecured business loans

On the other hand, unsecured business loans don't require security. That means they're suitable for businesses that don't have assets available, or firms that want to borrow more than they can support with assets. However, not having an asset in the background raises the risk for the lender — and so they often ask for personal guarantees for unsecured loans.

What is a personal guarantee?

A personal guarantee is your agreement that if your business can't repay the loan, you will be personally liable. That means you're indirectly involving your personal assets and net worth, so you should think carefully and seek professional advice before signing anything.

However, personal guarantees are often the only way of accessing large unsecured loans, and might be preferable to offering specific assets as security. If you're confident in your plans and willing to have some 'skin in the game', offering a personal guarantee to get an unsecured business loan can be a good option.

Secured vs. unsecured loans: which is best?

The main advantage of secured loans is that they are usually cheaper, because the lender's risk is lower when there is a specific asset involved. However, there are some downsides too. You need to have assets in the first place to consider a secured business loan, and you'll also only be able to borrow between 50% and 75% of the item's value in most cases.

Secured loans can also be a bit slower to arrange, because the lender may need to value the asset and undertake other due diligence processes.

Unsecured business loans are almost always quicker to arrange than secured loans, because no valuations are needed and the legal process is much simpler. You also don't need any tangible assets in your business, which means more businesses are potentially eligible.

The disadvantages of unsecured business loans are that they require a stronger track record, so if your business isn't making much profit or is fairly new, lenders will probably want tangible security.

Ultimately, choosing whether a secured or unsecured business loan is best depends on your business sitution. If you have assets available, a secured loan might be the most straightforward way to raise funds; but if you want to borrow money quickly or you're growing fast, an unsecured business loan might make the most sense.

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