Secured vs Unsecured business loans

[Michael14]

Hi,

I just started browsing business loans and I read that considering the market situation at the moment, almost all new loans will probably need personal guarantee from the Director.

Let's assume that this is the truth (as it very well might be in some scenarios), what is the difference then in secured and unsecured loan if both need personal guarantee?

If I understand this well, I own a flat under my name (no mortgage) and I can offer it as a security for my business loan. This would be a secured loan as flat value is higher than loan value. However, if I sign personal guarantee for unsecured loan, I will lose my flat anyway if I can't repay the loan (because it is my only asset).

Am I missing something? What is the difference between secured and unsecured in this case?

Thanks!

 

[ChrisCallaghan]

So I'm assuming your business is a company? E.g. a Ltd/Limited?

If so, then a lender may offer your company an unsecured loan (meaning they are not taking out security, such as a charge/debenture, against your company) but will ask for you as a director to sign a personal guarantee. In short, this would mean the lender could pursue you personally for the loan if your company defaults on its payments. This is the most common form of loan given to limited companies. If the lender had to call on the personal guarantee, and wanted to take action against your flat, they would either need to seek a charge through the courts or petition for your personal bankruptcy.

The above is nothing new - standard format for lenders when it comes to providing a loan to a limited company. It is very rare for any lender to offer a loan facility to a SME without the directors being asked to sign a PG.

Some lenders will offer a similar loan facility to the above, but in addition to asking the director to sign a personal guarantee, they may also wish to have the additional security of taking out a charge against your flat. This would make it easier for the lender to take action against your property, without the need to go to court to get a charge or needing to make you bankrupt.

You are not too far wrong in that, in either scenario, if you cannot afford to repay the loan, your flat would be at risk. Practically though, if you allow the lender to place a charge on your home, you are giving the lender greater ease to take action against your property if you default.

Hope that helps! You've already identified the risk to your property in either case.

 

[Mark T Jones]

@Chris Callaghan is spot on.

In practical terms a secured loan is a safer for the lender as it prevents you from hocking up against the house elsewhere and shortcuts the legal process in event of default.

Frequently a secured loan will incur additional up-front costs by way of legal and valuation fees.

A reputable lender will always ask (or require) you to take legal advice before taking a secured loan

 

[Chris Ashdown]

You may be better with just a PG, that way the flat is safe for the time , and if the debt is called in there is a legal avenue they need to take to get the flat sold, but before then many finance companies and banks will take efforts to avoid this action including a much smaller settlement number, when we went bust we owed the bank £26000, we told them we did not have the money but would sell our car worth £7000 and give that as full and final settlement, after a month they accepted the offer

You retain the right to negotiate which is important

 

[Mark T Jones]

You may be better with just a PG, that way the flat is safe for the time , and if the debt is called in there is a legal avenue they need to take to get the flat sold, but before then many finance companies and banks will take efforts to avoid this action including a much smaller settlement number, when we went bust we owed the bank £26000, we told them we did not have the money but would sell our car worth £7000 and give that as full and final settlement, after a month they accepted the offer

You retain the right to negotiate which is important

Where similar options are available then an unsecured loan us likely to be quicker, easier and potentially cheaper, so kind of a no-brainer

That said, there aren't many lenders in the market at the moment, so options may be limited

 

[japancool]

oday, a girl who sang incredibly beautifully needed a loan.

Youwhat?

 

[Mark T Jones]

the approval of any large loan now has to go with the consent of the owner of the bank.

Would that be all the shareholders, or a simple majority?