A Quick Guide to Secured Business Loans
A business loan, like a personal loan, can be secured or unsecured. A secured loan requires a valuable asset, such as property or equipment, as collateral. This often means lower rates and higher borrowing limits.
If your business owns any valuable assets such as property, land or equipment, you could be in a good position to access secured finance. Using your company’s assets as collateral could enable you to borrow more money at lower rates than if you took out an unsecured loan and, importantly, could prevent your personal finances from becoming entangled with your company borrowing.
What is a secured business loan?
A secured business loan is a source of funding for your business where you offer up an asset the company owns as security against your borrowing. This could be property, equipment, stock, land, vehicles or machinery.
While you still make monthly repayments on the loan as normal, the loan is secured against the asset so that, if you fail to keep up with your repayments and default on the loan, the lender can seize the asset and sell it to recoup their money.
What can I use a secured business loan for?
You might want to take out a secured loan to expand into new markets, buy more stock, hire staff or take advantage of new opportunities. Usually, there won’t be many restrictions on how you use the money, although a lender is likely to ask you what your intentions are before approving a loan.
If you’re wanting to invest in new premises or equipment, you might be better off exploring commercial mortgages or specialist financing options before applying for a secured loan.
How do secured business loans work?
When you apply for a secured business loan you’ll need to supply documentation about yourself, your company, the nature of your business, and the asset you are planning to use as collateral for the loan.
You can request a loan amount over whatever term and repayment schedule suits you, and the lender will carry out its own valuation of the asset against which the loan will be secured. The lender will then approve or decline the loan based on your creditworthiness and trading history, and the risk it perceives in lending to you. There will be specific criteria you have to meet, such as minimum annual turnover, a certain number of years’ worth of accounts, as well as a decent credit history for both the business and the owners or directors.
How much can I borrow with a secured business loan?
Secured business loans tend to be associated with borrowing larger amounts, but the amount you can actually get will depend on several factors. A lender will consider the value of the assets on which the loan is secured, as well as the profitability of your business. They typically prefer real, tangible assets such as buildings, land, cash or commercial equipment over, say, intellectual property rights which are harder to value. But, with lenders open to different types of assets as collateral, secured loans should, in theory, be an option for businesses operating in most sectors.
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If you don’t have assets to offer as security but you still need to borrow, you may be eligible for a government recovery loan announced by the chancellor in March 2021.
Pros and cons of secured business loans
- Where you have an asset to use as collateral, you are reducing the risk to the lender. This means you are less likely to be asked to give a personal guarantee.
- You should get access to better rates than if you take out an unsecured loan.
- You can usually borrow more over a longer period of time.
- You may be able to get a loan with a patchy or adverse credit history as the use of assets as security means there is less focus on credit record.
- Any asset you use as security on a loan is at risk if you can’t keep up your loan repayments.
- The process of getting a secured loan can take longer than for an unsecured one, as the lender will probably want to conduct its own valuation of your asset.
- You might have to pay an upfront fee to cover the cost of valuation.
- There might be more paperwork involved.
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Hannah is an award-winning journalist with a background in the trade press. She writes about finance, asset management and business for Shares, Citywire, FE Trustnet, and interactive investor. Read more