Types of Business Loans: Secured vs Unsecured, Term and Revolving Debt

That makes it appealing to businesses that don’t own substantial assets or simply don’t want to put property or equipment at risk.

Instead, lenders generally assess the business’s ability to repay based on factors such as its credit history, trading performance, cash flow and financial position.

However, “unsecured” does not necessarily mean that the borrowing carries no personal risk.

A lender may ask the business owner or director to provide a personal guarantee. This can mean that the individual becomes personally responsible for repaying the borrowing if the business cannot do so.

Advantages of Unsecured Business Loans

1. No Business Asset as Collateral

The obvious advantage is that you don’t normally have to pledge an asset such as property or machinery as security.

That can be particularly attractive for smaller businesses that do not have many assets.

2. Useful for Growing Businesses

A young or growing company may need funding before it has built up significant assets.

An unsecured loan can provide another route to finance, assuming the business meets the lender’s requirements.

3. Simpler Structure

Without the need to value and register security over an asset, the application process can sometimes be quicker and more straightforward than secured borrowing.

However, approval times vary between lenders.

4. Flexible Use of Funds

Depending on the product and lender, unsecured finance can be used for things such as working capital, marketing, hiring, inventory or other business expenses.

Disadvantages of Unsecured Business Loans

The main drawback is that the lender takes on more risk.

Higher Interest Rates

Because there is no asset providing additional security, unsecured borrowing can carry a higher interest rate than comparable secured finance.

That is why you should look beyond the advertised rate and consider the APR and total cost of borrowing.

Smaller Loan Amounts May Be Available

Without collateral, lenders may be more cautious about how much they are willing to lend.

A strong trading history and good credit profile can improve your chances of receiving better terms.

Personal Guarantees Can Matter

An unsecured business loan may still require a personal guarantee.

Before signing one, make sure you understand exactly what could happen if the business cannot repay the loan.

Examples of Unsecured Business Finance

Examples include:

• Start-up loans
• Mezzanine finance
• Business overdrafts
• Merchant cash advances
• Some forms of asset finance

The exact classification can vary depending on how a particular finance product is structured.

Secured vs Unsecured Business Loans: What’s the Difference?

The simplest difference is security.

With a secured loan, an asset is used as security for the borrowing. With an unsecured loan, the lender does not normally take a specific business asset as collateral.

Here’s a quick comparison:

For example, imagine a business borrows £50,000 and agrees to repay it through monthly payments over five years. That’s an example of term debt.

The interest rate can be fixed or variable, depending on the loan. With a fixed-rate loan, your repayments are generally easier to predict, which can make budgeting simpler.

Term loans are commonly used for specific investments where a business knows exactly how much it needs.

For example, you might use term finance to purchase machinery, renovate premises or fund a business expansion.

Term debt can be either secured or unsecured. The two concepts are therefore not competing categories. One describes the repayment structure, while the other describes whether collateral is involved.

Benefits of Term Debt

Predictable Repayments

You know how much you borrowed, how long you have to repay it and, depending on the interest structure, what your regular payments are likely to be.

That can make financial planning easier.

Suitable for Major Purchases

Term loans can work well when you’re funding a specific project or investment.

For example, if a machine costs £30,000, you can borrow the required amount and repay it over an agreed period.

Available From Different Types of Lenders

Banks and specialist lenders offer various term-loan products.

The amount and terms you qualify for will depend on factors such as your business’s financial health, industry, trading history and intended use of the money.

Disadvantages of Term Debt

The main limitation is that you generally need to apply for a specific amount.

If your cash requirements change significantly later, you may need another application or a different form of finance.

The application process can also involve detailed financial checks, particularly for larger loans.

Examples of Term Debt

Common examples include:

• Start-up loans
• VAT loans
• Bridging loans
• Asset finance

What Is Revolving Debt?

Revolving debt works differently from a traditional term loan.

Instead of borrowing one fixed amount and paying it back according to a set schedule, you receive access to a credit facility up to an agreed limit.

You can then draw money when you need it, repay some or all of the balance and potentially borrow again.

A business line of credit is a good example.

Think of it as having a financial safety net available when cash flow gets tight rather than taking one large lump sum upfront.

Credit cards are another familiar example of revolving credit.

How Does Revolving Debt Work?

Suppose your business has a revolving credit facility with a £20,000 limit.

You might use £5,000 to cover an unexpected expense.

You then repay that £5,000. Once the money becomes available again under the terms of the facility, you may be able to draw on it again.

Interest is generally calculated based on the outstanding balance, rather than the full credit limit.

That makes revolving credit particularly useful when your borrowing needs go up and down throughout the year.

Advantages of Revolving Debt

Flexible Access to Money

You don’t necessarily have to borrow the entire amount available.

You can draw funds when you need them and avoid borrowing money that you don’t currently require.

Useful for Cash Flow

Businesses often experience uneven cash flow.

Perhaps sales slow down during certain months, or customers take longer to pay invoices.

A revolving facility can provide short-term funding to help bridge those gaps.

Borrow, Repay and Reuse

Unlike a traditional term loan, revolving finance can potentially be used repeatedly within the agreed facility.

That makes it useful for businesses with recurring working-capital needs.

Disadvantages of Revolving Debt

Interest Rates Can Be Higher

Revolving debt can carry higher interest rates than some forms of term borrowing.

The interest you pay will also depend on how much you use and how long you carry the balance.

Variable Costs

If the interest rate is variable, the cost of borrowing can change.

Your monthly payment can also vary because it depends on the amount outstanding.

Easy Access Can Encourage Overborrowing

Flexibility is useful, but it can also become a problem.

Having access to a credit facility does not mean you need to use all of it. Businesses should have a clear repayment plan and avoid relying on revolving credit to cover an underlying cash-flow problem indefinitely.

Examples of Revolving Debt

Common examples include:

• Working capital revolving facilities
• Business credit cards
• Business lines of credit
• Some forms of overdraft finance

Which Type of Business Loan Is Right for You?

There isn’t one business loan that works for everyone.

The right choice depends on why you need the money, how much you need, how quickly you need it and what your business can comfortably afford to repay.

Here’s a simple way to think about it:

Need a large amount for an important investment?

A secured loan may be worth exploring if you have suitable assets and are comfortable using them as security.

Need a smaller amount without putting an asset at risk?

An unsecured loan may be a better fit, provided you can manage the potentially higher cost and any personal guarantee requirement.

Know exactly how much you need?

A term loan can give you a defined amount with a structured repayment plan.

Need access to money only when cash flow gets tight?

A revolving credit facility may offer more flexibility.

Of course, these categories can overlap. A term loan can be secured or unsecured, while a revolving facility can also be secured or unsecured depending on the product.

What Should You Consider Before Taking a Business Loan?

Before applying, don’t start with the question, “How much will the lender give me?”

Start with, “How much can my business realistically afford to repay?”

Consider:

• How much money you actually need
• What you will use the funds for
• How quickly you need the money
• Your current cash flow
• Existing business debts
• Your credit history
• The interest rate and APR
• Arrangement or application fees
• The repayment period
• Whether collateral is required
• Whether a personal guarantee is required
• What happens if your business cannot repay

It can also be useful to compare the total cost of borrowing, rather than choosing a loan simply because it has the lowest advertised interest rate.

Conclusion

Knowing the differences between the various types of business loans can greatly simplify the process of selecting financing.

Secured loans can provide larger borrowing amounts and potentially more competitive rates, but they put assets at risk. Unsecured loans avoid using a specific asset as collateral, although they can cost more and may require a personal guarantee.

Term debt is useful when you know how much you need and want a structured repayment plan, while revolving debt gives you more flexibility to borrow, repay and borrow again as your cash flow changes.

The best business loan is not necessarily the one offering the most money. It is the one that fits your business’s purpose, cash flow and ability to repay without putting unnecessary pressure on the company.

Before taking on any significant borrowing, consider getting independent financial or specialist advice based on your business’s circumstances.

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