Secured Business Loan
Secured lending provides businesses with the opportunity to access flexible and affordable capital by offering one or more assets as collateral. A secured business loan can be an ideal option for small and large businesses where substantial sums of money are needed quickly.
In our introductory guide to secured business loans for SME, you will find all the insights and information needed to determine whether secured lending is right for your business.
What Are Secured Business Loans?
Secured business loans are financial products issued on the basis of the security offered by the borrower. Also referred to as asset-backed lending, the applicant uses one or more business assets as an ‘insurance policy’ of sorts to cover the costs of the loan.
Depending on the value of the asset (or assets) the loan is secured against, secured business loans can be provided for any amount. Secured loans are considered a lower-risk product by lenders as they are backed by assets of value, enabling them to be offered at more competitive rates of interest than unsecured loans and for larger amounts.
The borrower’s assets, however, may be repossessed by the lender in the case of non-repayment.
The Features of Secured Business Loans
Most business loans are provided as bespoke solutions, negotiated between the business and the lenders in accordance with the borrower’s requirements. Secured borrowing is typically far more flexible than unsecured borrowing, often enabling a business to repay the balance gradually over a longer period of time.
Other typical features of secured business loans include the following:
- Easy to arrange and often with no deposit to pay
- Lower rates of interest than comparable unsecured loans
- The ability to borrow a high percentage of the asset’s value
- Loans are available for any amount depending on the security offered.
- Open to applicants with a poor credit history
- Long repayment periods
- Flexible terms to suit all preferences and requirements
Ensuring you get the best possible deal on a secured business loan means comparing as many deals as possible with the help of an independent broker. Specialist lenders often offer their services exclusively via established brokers, so it is essential to seek broker support rather than approaching lenders directly.
How Do Secured Business Loans Work?
Secured business loans work in a similar way to mortgages, but in this instance the applicant must already own an asset of sufficient value to cover the value of the loan. Business loans can be taken against a wide variety of assets, often land, residential and commercial premises.
A valuation is carried out to verify the value of the asset, at which point the lender will offer a loan of the required amount. If the loan is fully repaid in accordance with the terms and conditions of the agreement, the borrower retains ownership of their assets. In the event that the borrower defaults on the agreement, the lender has the legal right to repossess the assets.
Terms, conditions and interest rates vary from one product and lender to the next, emphasising the importance of shopping around with the support of an independent broker.
How Much Can I Borrow?
Maximum loan amounts are typically restricted only by the value of the asset (or combination of assets) offered by the applicant. Lenders will offer a percentage of the asset value dependent on criteria.
It is worth noting that the bigger the percentage difference between the value of the security compared with the size of the loan, the lower the interest rate. As the asset provided by the business is effectively the insurance policy covering the loan, high-value assets are usually preferred by lenders.
Which Types of Security Are Accepted by Lenders?
Lending policies vary significantly from one lender to the next, with regard to which types of security are suitable for a loan.
Tangible assets include the most common forms of security like commercial or residential property or land. Some lenders may also be willing to accept the personal assets of the applicant as security, such as the borrower’s car or other high-value possessions like jewelery.
Intangible assets may also be accepted by some commercial finance lenders, which include non-physical securities like intellectual property, company shares, copyrights, patents and trademarks. Intangible assets can be more difficult to assign a formal and/or agreed value to than conventional physical assets.
What Are the Main Benefits of Secured Business Loans?
Secured lending can be advantageous for SMEs in many ways, including but not limited to the following:
- Larger Loan Amounts– There are technically no limitations whatsoever to how much you can borrow in the form of a secured loan. If you are able to offer viable assets of sufficient value, lenders are often willing to offer a high percentage of the value of the assets in the form of a secured loan.
- Flexible Repayment Terms – Choose to pay off your secured business loan as quickly as possible to minimise borrowing costs or repay the balance gradually over a longer period with a series of affordable monthly payments. Flexible options are available to suit all requirements and budgets.
- Competitive Interest Rates – As secured loans are considered lower-risk on the part of the lender, they are usually offered at much more competitive rates of interest than comparable unsecured loans. Overall borrowing costs can also be significantly lower.
- Poor Credit Applicants – A poor credit history (or no credit history) need not be an obstacle when applying for a secured business loan, as eligibility is weighted towards the assets offered to cover the costs of the loan.
- Ideal for New Businesses – Smaller and newer businesses in particular are prone to running into cash flow issues from time to time and may benefit from the opportunity to tap into the equity they have tied up in their assets.
Depending on the type of secured business loan you apply for, arranging the facility can also be much quicker and easier than organising a comparable unsecured loan.
Is Secured Lending Risky?
Applying for a secured loan means understanding and acknowledging the fact that your assets are at risk of repossession if you fail to keep up with your repayment requirements. This is why business loans should only ever be secured against assets where the applicant is 100% confident in their ability to comfortably repay the balance in full.
If you encounter any difficulties whatsoever while repaying a secured loan, it is vital to speak openly and honestly with your lender at the earliest possible stage. It is never in the best interests of banks and lenders to commence asset repossession proceedings as doing so is considered a last resort option only.
Will My Business Qualify for a Secured Loan?
Eligibility is established primarily on the basis of the value of the assets used to secure the loan. All lenders, however, have their own unique policies and criteria that must be fulfilled, which may include some combination or variation of the following:
- Your ability to provide evidence of asset ownership
- A minimum of three months’ trading history as a UK business
- You must be based in the UK at the time of application
- Evidence of a stable financial position (for poor credit applicants)
If you have any questions or concerns regarding your eligibility for a secured business loan, consult with an independent broker before applying. This will enable you to ensure you target the right lenders for your requirements, such as those who specialise in subprime business loans.
What Is A ‘Personal Guarantee’ and Do I Need One?
A personal guarantee may be required alongside eligible assets where the applicant operates a limited liability company or a limited liability partnership. It may also be possible to qualify for a secured loan with a personal guarantee alone, without the provision of assets to secure the facility.
Where personal assets are required as security for a secured business loan, most lenders are willing to accept residential & commercial properties and land. Others accept high-value possessions like jewellery and vehicles.
Is Property with An Outstanding Mortgage Acceptable Asset?
Yes, but it depends how much equity you have tied up in the property and the extent of the outstanding mortgage. For example, if you have repaid 75% of the property loan on a £200,000 property, you have £150,000 equity. A lender may therefore be willing to offer a high percentage loan secured against the equity you have in the property.
If, however, you have only recently purchased a property, you may have insufficient equity to qualify for a secured loan.
Can I Qualify Without Any Assets?
Secured business loans are provided exclusively on the basis of security. If you do not have any valuable assets (or assets considered eligible by lenders), you may still be able to apply for an alternative facility like an unsecured business loan.
In addition, it is important to remember that intangible assets like shares, intellectual property, trademarks and patents may be considered acceptable collateral by some lenders.
Where Can I Find Out More?
For a clearer indication of what to expect if you decide to go ahead, use our online secured business loan calculator. Simply enter the amount you would like to borrow, the approximate APR and the length of the repayment period to find out the total borrowing costs.
Alternatively, contact a member of the team at UK Property Finance anytime for an obligation-free consultation.