A secured business loan (SBL) is a loan whereby a lender will agree to provide finance for your business based on a specific piece of collateral (the security) – such as a business vehicle or commercial property – which the lender can claim if you fail to meet your loan repayments. For many smaller UK businesses, the prospect of using a company asset as a loan guarantee can be a daunting prospect. But, if you’re a UK SME with assets, SBLs could be a smart way of raising the finance you need.
What is a secured business loan?
A secured business loan allows you to use a company asset – or the combined value of multiple assets – as security against the amount you borrow. The lender then uses your asset(s) as a form of guarantee that they will be able to recoup the value of the loan in the event of repayment terms not being met. Because these reduce the risk to the lender, they are often able to offer better repayment terms (lower interest rates) than you might typically find with an unsecured loan.
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How do secured business loans work?
Secured business loans work in much the same way as other forms of business lending. The lender will agree to provide your business with a loan, based on your specific needs and the value of the assets you can use as security against the loan. If you fail to make the repayments, the lender has the right to claim ownership of the assets that you put up as security and use this to recover the money owed.
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What can be used as collateral against secured business loans?
Secured business loans can suit a variety of different business types as – depending on the lender – almost anything can be used as security to guarantee a business loan in the UK, as long as it has value.
The point of a secured loan is that the lender can use the security to recoup losses if you default on the loan. Lenders, therefore, will always prefer assets that can easily be valued. As well as assets that can be simply resold, hold their value well, are important to your business and, crucially, have more value than the amount you want to borrow.
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Pros and Cons of Secured Business Loans
Pros
The main benefit of a secured business loan is that it typically enables a business to loan higher amounts with more favourable terms. The security offered as part of the loan gives the lender lower risk, which makes the following elements more favourable to the borrower:
- Higher borrowing amounts – the amount you can borrow depends on the value of the asset(s) you put up as security against your loan. Some lenders may even allow you to borrow 100% of the net value of these assets.
- Lower interest rates – the main advantage of offering assets as security is that secured business loans typically offer lower interest rates than unsecured loans and other forms of business borrowing. This is because lenders have confidence in an alternative repayment route (through the business asset) and so their risk of not being repaid is reduced.
- Longer repayment terms – a longer repayment term (repaying your loan over a longer period of time) will mean your monthly payments will be lower. This eases the burden on cash flow.
- More accessible – there’s less emphasis on your trading history and credit history (because any assets you use are a form of guarantee for the lender). This makes secured loans a good option for early stage businesses without trading history, or for SMEs with an imperfect credit rating.
Cons
Secured Business Loans are a good funding option for businesses with assets and confidence in their ability to meet the repayment schedule. Conversely, they won’t be appropriate for all smaller businesses. Due to the nature of the application process, they won’t necessarily be right for those with an urgent funding need.
Identifying assets – You’ll need to have assets in your business that you’re willing to put up as security which won’t suit every business. Clearly, if you can’t repay the secured loan, the lender can claim/sell the asset(s) to recoup the cost of the loan.
Upfront costs – Valuation fees and also legal fees are often required before the funds can be granted if the lender places a legal charge on your property. If the valuation isn’t favourable, your loan might be declined altogether, or the lender may offer a lower loan amount. You will still need to pay the valuation fee whatever the outcome.
Longer application process – It may well take longer (potentially several weeks) to access funds, compared to other types of financing, because you’ll have to wait for the lender to complete their valuation assessment. This doesn’t necessarily suit businesses with a more time-sensitive finance requirement.
Repayment value – businesses should always look at the overall cost of the loan. Even if the loan provides lower interest rates than other products, the overall cost of borrowing costs can be significant over a long-term loan.
What is a secured business loan?
A secured business loan allows you to use a company asset – or the combined value of multiple assets – as security against the amount you borrow. The lender then uses your asset(s) as a form of guarantee that they will be able to recoup the value of the loan in the event of repayment terms not being met. Because these reduced the risk to the lender, they are often able to offer better repayment terms (lower interest rates) than you might typically find with an unsecured loan.
An SBL presents a reduced risk for the lender and therefore increases your chances of securing a loan, and may also allow you to borrow more money, for a longer term. It may also mean you are offered better interest rates compared to those for an unsecured loan.
Business loans can be secured against a range of different company asset types, but are typically secured against property, equipment, machinery or land. There are other types of secured lending though. For example, invoice finance allows you to use your invoices and accounts receivable (i.e. money owed to your business) as security for a loan. Some lenders allow you to use cash as security. Be aware, however, that cash-secured business loans usually have different terms attached, compared with loans secured with property.
If you’re looking to grow your business, perhaps by investing in new technology or equipment, improving marketing efforts, or taking on additional staff, there are many banks and alternative finance providers who can offer secured loan products.
How do secured business loans work?
Secured business loans work in much the same way as other forms of business lending. The lender will agree to provide your business with a loan, based on your specific needs and the value of the assets you can use as security against the loan. If you fail to make the repayments, the lender has the right to claim ownership of the assets that you put up as security and use this to recover the money owed.
Unlike an unsecured business loan, where the lender will typically specify the loan amount based on your annual business turnover, secured business loans give the opportunity to secure larger loan amounts.
Depending on the complexity of your operations, and the application process of the lender, applying for a secured business loan may take longer than other, smaller loan amounts. The process is similar to a mortgage application and the lender will have to value any assets you’re putting up as security.
Once the assets have been values and the lender is happy with the application, a business will receive the cash which will subsequently be repaid in monthly instalments over the course of your loan term. The loan term will be set as part of the application process and you can choose to take out a short-term loan or medium/long-term loan, depending on your business needs.
Secured business loan – a worked example.
- Business Ltd applies for a £100,000 loan and offers the lender its commercial property (the asset) as security against the loan.
- The lender assesses the application, gives a conditional offer, and asks for an independent valuation to confirm the value of the property and its suitability as security.
- Business Ltd pays an upfront fee to cover the costs of the lender’s valuation process (valuing the commercial property) and any legal fees should the lender want to place a charge on the property (this means that if the commercial property is sold or re-mortgaged before the debt is cleared the lender will be paid off from the proceeds).
- The lender confirms your asset is valued as higher than the value of the loan.
- Business Ltd agrees to pay a fixed interest rate of 7%, and to repay in monthly instalments over 30 months of £3,643.19.
- The total interest Business Ltd pays back will be £9,295.72 (excluding origination fees)
In addition to secured business loans, you might also want to consider factoring or invoice financing (borrowing using unpaid invoices as security) or asset finance (borrowing against assets on your balance sheet).
What can be used as collateral against secured business loans?
Secured business loans can suit a variety of different business types as – depending on the lender – almost anything can be used as security to guarantee a business loan in the UK, as long as it has value.
The point of a secured loan is that the lender can use the security to recoup losses if you default on the loan. Lenders, therefore, will always prefer assets that can easily be valued. As well as assets that be simply resold, hold their value well, are important to your business and, crucially, have more value than the amount you want to borrow.
What do lenders look for in a secured asset?
In practice, you can use any valuable asset as security for a business, but when evaluating a business’s asset for a secured loan, lenders will look at how ‘encumbered’ the security is (i.e. is it fully owned by the business looking for a loan, or are there other ownership entities involved?).
Example of hard assets a lender may consider as security against the loan:
Heavy machinery (e.g. plant machinery, printing presses).
Commercial property (e.g. offices, storage and warehouses, shops)
Commercial vehicles (e.g. company cars, fleet vans, lorries)
Some lenders might also accept soft assets, for example, unsold inventory.
Lenders might also require a personal guarantee as an additional form of security.
Whilst other lenders may consider a net value of multiple assets including personal assets such as your residential property, car or shares.
Using property to secure a business loan
Commercial property is commonly used as security in SBL deals. Some lenders may accept personal residential property as security against the loan value.
Will the lender require a legal charge on the property
If you’re offering commercial property (or land) as security, and it has an existing mortgage, the lender may register a legal or equitable charge on the property.
The main difference between a legal charge and an equitable charge is whether the lender is granted the power of sale.
A legal charge is an actual legal interest in property (or land) and gives the lender the power of sale if you fail to keep up the loan repayments. In order to achieve this right, the lender will require consent from your existing lender (for example, your mortgage provider) which can slow down the fund application process.
If the lender registers an equitable charge over your property without the consent of your mortgage provider, the lender does not automatically gain the power of sale over the property, but they do gain enough security to approve your loan.