Secured vs unsecured rate

Definition

A secured facility is backed by a charge over an asset, so the lender can recover value on default — which lowers the risk and the margin. An unsecured facility has no such backing, so it is priced higher to compensate. The gap can be several percentage points.

In plain terms

Pledge an asset and you usually pay less; borrow on your word alone and you pay more. Security is a lever on the rate.

Why it matters for your company

Weigh the cheaper secured rate against putting an asset on the line. See how lenders price risk via how lenders price risk into your rate.

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How lenders read it

When a lender looks at a facility priced on an unsecured basis, they are leaning almost entirely on the strength of the company's covenant — its trading history, cash generation and management track record — rather than on any asset they could fall back on if things went wrong. That is why the assessment tends to probe deeper into the business itself: recent accounts, the consistency of turnover, and how the company has handled its obligations to date all carry more weight than they might for a secured request.

Offer security instead, and the conversation shifts. The lender's attention moves toward the asset being charged — what it is, how readily it could be realised, and whether its value is likely to hold up. A stronger asset backing can support a case even where the underlying trading picture is less clear-cut, because the lender's downside is partly covered by the charge itself rather than resting solely on the company's promise to pay.

Common pitfalls

A frequent misstep is treating the secured route as automatically the better choice without weighing what is actually being pledged. Charging an asset that the business relies on operationally — rather than one that is genuinely spare — can create pressure later, even if the rate looks more attractive on paper today.

Another is assuming the unsecured route is always the fallback for weaker businesses. In practice, some companies deliberately choose unsecured facilities to keep assets unencumbered for other purposes, accepting the higher cost as the price of that flexibility. The right choice depends on the company's wider plans, not just on which rate looks lower in isolation. Directors weighing this up often find it useful to read how lenders price risk into your rate alongside the related entry on credit margin, since both the security decision and the margin applied stem from the same underlying risk assessment.