Secured vs Unsecured Business Loans
Introduction
According to the Central Statistics Office in 2021, 69.2% of all employees in Ireland worked for an SME. This striking statistic underlines the importance of SMEs to Ireland’s economic health. Knowing this, GRID Finance offers cash advance loans and flexible repayment loans designed to help SMEs succeed and grow.
After deciding that your business should borrow, you need to identify the most suitable loan. However, as time isn’t on your side when running a business, this article briefly outlines your two principal business borrowing options: secured and unsecured loans.
Understanding secured business loans
Before making any decisions about choosing a secured or an unsecured loan, it’s important to understand each option clearly. So let’s take a quick look at what characterises both types of loan, plus the benefits and drawbacks of each.
Definition and basics of secured loans
A secured loan is a loan that gives a lender the legal right to seize an asset owned by the borrower if the debt isn’t repaid. Such an asset is called ‘collateral’ and can be anything that’s easily sold and converted into cash – for example, cars, equipment or property. Generally, secured loans are used when larger amounts of money are borrowed.
Benefits of opting for secured loans
A key benefit of secured loans is that they typically offer lower interest rates as the lender’s risk is reduced. They can also have longer repayment periods which makes them more affordable.
Types of secured business loans available
A number of different options are available if you are considering a secured loan. However, none of these offer the flexibility that’s built into an unsecured loan from GRID Finance.
Term Loans
A term loan is a loan repaid over a fixed period or term, ranging from a few months to a number of years. During this time, a set number of regular repayments are made. If a fixed interest rate has been agreed by the borrower and lender, repayments will remain the same. On the other hand, opting for a variable interest rate would mean repayments change in step with the general interest rate.
Asset Finance
Virtually every Irish business needs tools or equipment, ranging from laptops to highly complex and expensive machinery. These can be acquired using different forms of asset finance such as hire purchase, finance leases and operating leases. With these options, the finance provider generally retains ownership of the asset for a period.
In contrast, borrowing from GRID Finance means your business will fully own any asset purchased using the borrowed funds. we could leave this copy in for now and then change when we are ready to launch leasing
Commercial Mortgages
A commercial mortgage is a loan provided to buy or refinance property such as offices, retail space or warehouses. As the mortgage is secured against a major asset, lenders consider it a less risky form of lending and offer longer repayment periods, possibly up to 30 years.
Criteria for secured loans
Lenders always aim to minimise the risk of not being repaid. So in addition to collateral for secured loans, they will also seek other assurances that a borrower can meet their repayments in full.
Eligibility and requirements
To confirm that a business is eligible for a secured loan, lenders typically undertake a
credit check to evaluate the business’s overall creditworthiness. This can happen in step with an affordability assessment which examines factors such as income, expenses and cash flow.
Finally, the collateral offered will also be valued, often by third-party appraiser, and all documentation will be verified.
Common assets used as collateral
Lenders seek collateral which can be sold relatively easily. Obvious examples are property (e.g. buildings and land), vehicles, investments including stocks and bonds, equipment and machinery.
Understanding unsecured business loans
While unsecured loans share many similarities to secured lending, they have their own important characteristics:
Definition and basics of unsecured loans
Examples of unsecured lending include credit cards and personal loans. Unsecured loans like these don’t require borrowers to offer assets as collateral. Instead, lenders base their decisions on a borrower’s general creditworthiness.
This means factors including the borrower’s credit score and revenue history are considered.
Often lenders will also charge a higher rate of interest because they face more risk.
Benefits of opting for unsecured loans
For borrowers, unsecured loans can be easier and faster to arrange and there’s no risk of an important asset being seized if repayments aren’t met.
Generally, repayments for unsecured loans are also fixed which makes budgeting straightforward. Unsecured borrowing can also help build a positive credit score and reduce the cost of future loans.
Types of unsecured business loans available in Ireland
A number of options are available for Irish businesses seeking unsecured lending. They include the following:
Credit Cards
With a business credit card, purchases can be made up to an agreed credit limit and balances can be carried forward from month-to-month. However, while flexible and easy to use, business credit cards have relatively high interest rates.
Invoice Financing
With Invoice Financing, invoices awaiting payment are sold to a lender at a discount. The lender can then collect the invoice’s full value after advancing a percentage of this to the borrower.
Line of Credit
A Line of Credit is a flexible loan that lets a business withdraw funds whenever they are needed. Interest is only paid on the amount borrowed.
Merchant Cash Advance
A Merchant Cash Advance (MCA) offers lenders a lump sum in exchange for a portion of future sales made using credit and debit cards. Repayment levels mirror the business’s performance because they are adjusted according to daily sales.
GRID Finance offers MCA loans of between €10,000 and €150,000 and base repayments on sales made using the borrower’s card machine(s). This means less is repaid during slower periods and more when trade increases.
Flexible Repayment Loan
The Flexible Repayment Loan from GRID Finance offers Irish businesses a tailored solution that aligns with their income. If your company sells to other businesses and receives payments directly into your bank account, GRID provides a loan with small, daily repayments that adjust to your cash flow. This means you only repay as you earn, making it easier to manage your finances.
With secure open banking integration regulated by the Central Bank of Ireland, the process is quick, transparent, and easy to complete. Plus, once you’ve repaid most of your loan, you can effortlessly request new finance, ensuring ongoing support for your business.
Criteria for unsecured loans
As unsecured lending is riskier for lenders, an unsecured loan can cost more and impose stricter conditions than a secured loan.
Eligibility and requirements
Lenders offering unsecured business loans typically look for a strong credit score, proof of a consistent revenue stream and an operating history of between six months and two years. Some lenders may also seek a personal guarantee making the owner liable if the loan is not repaid.
Occasionally, they will also request a business plan that explains how the loan will help grow the business.
Differences between secured and unsecured loans compared
When deciding between a secured or an unsecured loan, it makes sense to compare their various advantages and disadvantages. Here’s a quick guide to both:
| Advantages | Disadvantages |
| Lower Interest Rates: Having collateral means lenders face less risk and can offer lower interest rates. | Risk of Asset Loss: If the borrower defaults, the lender can seize the asset being used as collateral (e.g. property, equipment or vehicle). |
| Higher Loan Amounts: Lenders are willing to offer larger loans due to the security of collateral. | Slower Approval Process: Lenders will need to assess the collateral’s value which can delay the approval process. |
| Longer Repayment Periods: Extended repayment periods, reduce the size of monthly payments. | Restricted Usage: Some secured loans (e.g. mortgages or vehicle loans) are specific to certain purchases. |
| Easier Approval: Borrowers with lower credit scores can qualify if they can offer suitable collateral. | Higher Interest Rates: Lenders charge more due to the higher risk. |
| No Collateral Required: Borrowers don’t risk losing assets if they don’t repay in full. | Smaller Loan Amounts: Loan limits are usually lower because there’s no collateral to secure the loan. |
| Faster Approval: Without collateral to evaluate, the loan process is quicker. | Smaller Loan Amounts: Loan limits are usually lower because there’s no collateral to secure the loan. |
| Flexible Use: Funds can be used for various purposes. | Stricter Eligibility Requirements: Lenders look for a solid credit, stable revenues, and a low loan-to-debt ratio. |
Evaluating the right loan for your business
After identifying the differences between unsecured and secured loans, we can now examine how to choose between them…
Assessing your needs and loan suitability
To decide on the best loan option, you need to consider your business’s credit score, what collateral you can offer, your risk tolerance and how quickly you need to arrange funding.
A secured loan may be better if you have assets that you can pledge as collateral and want lower interest rates or a higher loan amount. For quicker access to funding, combined with no collateral and more flexibility, an unsecured loan may be your best option.
How GRID Finance can meet your needs
If you choose an unsecured loan, GRID Finance can offer options designed around the realities of business life. Specifically, you can apply for a Flexible Repayment Loan which offers up to ten times your business’s monthly revenue and bases repayments on your current sales levels.
GRID Finance knows that SMEs can’t hang around waiting for a lending decision. So you’ll hear if your application has been approved within 48 hours, after which the money can be in your account within another 24 hours.
Navigating the application process
Knowing how busy you are, the GRID Finance loan application process has been made straightforward and hassle-free. In fact, all the steps can be covered online in under five minutes.
Step-by-step guide to applying
You can apply if your business is registered in the Republic of Ireland, has traded for at least nine months and uses a card machine or an online payments processor to take revenue.
Note – if you’re applying for our FRL option, please schedule a quick call to discuss the best path froward for your business.
First, set up a GRID Finance account online here and start a new application. Then tell us how much you need – you can borrow upwards of €10,000 and if you require more than €250,000, we’ll discuss what’s possible.
Then, you’ll need to upload documentation (details of which are listed below) and complete some declarations to confirm your information is accurate. Then submit your application and we’ll take it from there.
Documentation Needed
Before you apply, make sure you have the following documents ready to upload via a desktop computer:
- six months of up-to-date bank statements in soft copy format or a read-only Open Banking Connection.
- a valid tax clearance certificate.
For a larger loan, we may ask for further documents such as audited financial accounts and management accounts.
Risks and mitigation
Before making any final borrowing decisions, you should always assess any associated risks and how they can be reduced.
Risks associated with secured and unsecured loans
With a secured loan, the asset offered as collateral could be lost if you cannot repay in full. If this asset is central to the business’s operation – an essential piece of equipment, for example – its loss could have a serious impact on your ability to trade.
The extra time involved in arranging a secured loan might also cause problems if you are under pressure to obtain funding.
Unsecured loans typically come with higher interest rates. Also, any past issues with your business’s credit record might make it harder to obtain a loan.
Strategies to mitigate these risks
You can reduce the risk associated with a secured loan by offering an asset that is not mission-critical to your business. If possible, you should also have an emergency fund from which you can maintain payments if your business encounters cash flow problems. With all types of loan, you should also be realistic about how much you borrow and avoid applying for more than is strictly necessary.
Overall, a Business Loan from GRID Finance can make borrowing far more manageable as you don’t face the pressure of fixed repayments and important assets are not put at risk.
Conclusion
As with any decision affecting your business’s financial health, it’s important to carefully consider the pros and cons of secured and unsecured loans before opting for either.
With GRID Finance, you would work with a loan provider that understands the contribution that SMEs make to Ireland and wants them to succeed. This commitment explains why we do our utmost to offer business loans that combine real flexibility and affordability.
So if you’re in the market for a business loan, talk to GRID Finance today and let us show you a far more business-friendly way to borrow for growth.
