Whether you're a business owner or an individual seeking funding, understanding the difference between secured and unsecured loans is key. Each type comes with its own risks, benefits, and legal implications. This simple guide breaks down the essentials to help you choose the right option for your needs.
What is a secured loan?
A secured loan is a type of loan that is backed against an asset owned by the borrower. The lender will take security over that asset as collateral in the event the borrower fails to repay the loan.
Examples of secured loans can include:
• commercial mortgages over business premises
• asset-based lending
• equipment financing
The borrower’s assets act as a security for the lender. This means if the borrower is unable to meet their obligations, the lender can repossess and sell the secured asset to help recover the loan.
Typically, secured loans will offer a cheaper form of borrowing (depending on the type of funding you are looking for) compared to unsecured lending. Borrowers are also often able to borrow for a longer period. However, there are several factors that are considered by lenders when looking to lend monies, including (but not limited to):
• a business’ financials
• the type of funding required (is it for development finance, revolving credit facility, bridging etc)
• the assets being offered as security
• any existing secured creditors
Unsecured loans
Unsecured loans can include:
• general term loans
• company credit cards
• overdrafts
As no assets of the borrower are offered as security, unsecured lending often comes with higher interest rates, shorter terms and will be for a lower amount.
Whilst the lender doesn’t have security over any assets of the borrower, failure to repay the loan can still result in legal action to recover payment (options available to a lender (depending on the circumstances) include seeking a decree for payment, inhibition and/or sequestration of the borrower).
Which loan is right for me?
There are several factors that should be considered by a borrower including (but not limited to):
• what are you looking to use the loan for
• the type of funding required (is it for development finance, revolving credit facility, bridging etc)
• are there any assets that can be offered as security
• any existing (secured) creditors (are there any restrictions on being able to borrow new monies and/or grant new security).
New opportunities for secured lending in Scotland
The introduction of the Moveable Transactions (Scotland) Act 2023 has modernised how businesses and individuals can use assets as security for loans. Under the new regime, a wider range of moveable assets - such as intellectual property, receivables, inventory, and equipment - can now be used to secure borrowing through a simplified statutory pledge system. This reform enhances access to finance, particularly for SMEs and individuals, by allowing lenders to take security over assets that were previously difficult or impractical to secure.
At Thorntons, our experienced Banking Team is here to guide you through your funding journey, ensuring you understand the terms and conditions of the loan, and that they’re fair, legally compliant, and offer the protection you need.
Get in touch today to speak with one of our solicitors and make confident, informed decisions about your next transaction.
