Secured vs unsecured loans, what’s the difference?

by Apr 20, 2017Intermediary Tips, Investment Tips, Small Business Tips & Advice

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Following in our series on the alternative finance marketplace, we examine secured vs unsecured loans.

Secured vs unsecured loans pros & cons

Understanding secured vs unsecured loans and what they entail as an investor or a business owner seeking growth finance can mean the difference between success and failure.We’ll look at the pros and cons for investors and the businesses taking out loans by these two means.

Secured loans

Secured debt in the context of business loans is used when a business secures collateral against the figure they are being loaned. This reduces the associated risk to the lender should the borrower default. If this happens the assets secured against the debt can be sold and the money from the sale used to pay back the debt.

These assets are considered security and could make secured loans less risky than unsecured loans. They can give investors peace of mind as there is a better chance of recouping any losses should the business fail.

Secured loans are ideal for businesses that are already established and have assets, such as property or equipment that can be used as collateral. Taking out a secured loan can mean that you can apply for a larger sum with lower interest rates than unsecured loan rates.

What if your business doesn’t have much in the way of physical assets yet?

Unsecured loans

As the name implies unsecured loans are not backed by any underlying assets.  This type of loan is more likely to be taken out by a start-up or seed business that has a potential market for their product, but no solid assets to use as collateral.  They may also be more appealing to tech businesses that provides a service rather than a physical product.

Of course, if the owner of the business has personal assets these can be used to get a secured loan, but if that’s not an option, an unsecured loan may be the answer.

As would be expected, the interest rate is usually higher on this type of loan, making it attractive to investors comfortable with a higher level of risk. The possibility of a higher return on investment has appeal, the downside being if the business doesn’t succeed there are no assets that can be sold to recoup the value of the loan taken.

CODE Investing offers both secured and unsecured loans to strong, high growth businesses, giving investors the ability to diversify their investments, and SMEs the flexibility they need all in one marketplace.

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Risk Warning

Investing in early stage businesses involves risks, including illiquidity, lack of dividends, loss of your investment and dilution and it should be done only as part of a diversified portfolio. CODE Investing Limited is targeted exclusively at investors who are sufficiently sophisticated, or who are judged by CODE Investing Limited otherwise to be appropriate, to understand these risks and make their own investment decisions. You will only be able to invest with CODE Investing Limited once you are registered as sufficiently sophisticated or otherwise appropriate for these types of investment. Investors via CODE investing are not protected from loss by the Financial Services Compensation Scheme against the Company’s default or for any losses they may suffer. Please read the full risk warning for more information. This page has been approved as a financial promotion by CODE Investing Limited, which is authorised and regulated by the Financial Conduct Authority. Investments can only be made on the basis of information provided in the pitches by the companies concerned. CODE Investing Limited takes no responsibility for this information or for any recommendation or opinions provided by the companies.

Tax Wrappers note: Innovative Finance ISA (IFSA), Self Invested Personal Pension (SIPP) and Small Self Administered Scheme (SSAS) : eligibility depends on an individual’s circumstances and is subject to change in the future.