Secured business loans help businesses gain access to higher-value funding by using business assets as collateral.
By Laura Rettie, Personal Finance Journalist.
Secured business loans can be a great way to access the funding you need for your business. Use our handy guide to understand how they work and how to find the best deal for your business.
It’s a type of loan secured against your business’s assets.
Also known as secured commercial loans or asset-based lending, it's a way to obtain capital to help grow your company.
All types of businesses are eligible to leverage commercial finance, such as:
Secured commercial borrowing is used for a variety of reasons. Companies can use it for developing their business, working capital, or refinancing.
Here’s some of the most common reasons for taking out a business collateral loan:
Secured business loans work like most other loans; you’ll borrow a sum of money and pay it back with interest over an agreed timeframe.
The difference is that your business assets will be used as collateral to repay the debt if your company defaults on the loan. This means your business or home could be at risk if you cannot keep up with repayments.
Business collateral loans are less risky for lenders, so interest rates tend to be lower, and repayment terms can be more flexible.
However, if your business gets into difficulty and you cannot repay the loan, the asset you’ve provided to secure the loan will be sold to recover the funds you’ve borrwed. So, while it may be the cheapest way to borrow for your business, it could also be the riskiest.
It depends on the lender and the commercial loan terms. Examples of collateral could be:
Business loans secured against a property - business or residential - are most common but your home or business may be at risk if you cannot repay the loan.
The cost of a secured commercial loan depends on how much you borrow and the terms you agree with the lender.
Generally secured loans are cheaper than unsecured business loans because you’re borrowing against a valuable asset and pose less risk to the lender.
The APR or interest rate affects your monthly repayment amount and overall loan cost. For example, you may be offered a:
Fixed rate: Your payments will remain the same throughout the borrowing period.
Variable rate: Monthly repayments may vary because the interest rate will fluctuate with market conditions.
Other costs may include upfront fees for loan arrangement and legal fees for property valuations or independent asset valuing.
The maximum amount you can borrow will depend on the value of your assets.
You could potentially borrow up to 100% of the value of the assets you’re using as a guarantee. Some lenders may consider the value of multiple assets, for example, machinery plus your residential property.
However, most businesses will borrow between 50-70% of their asset value.
You can apply for a secured loan with a bank, direct lender, or via an online broker.
An online broker will have access to a panel of specialist lenders and have the expertise to find the right loan for your business.
On application, the lender may give a conditional offer, subject to independent valuation of the assets offered. Be prepared to pay an upfront fee to cover the lender’s costs in valuing your asset and any legal fees if a property is involved.
Your business must be registered within the UK for at least three months to be eligible for a secured business loan.
Be prepared to show documents to evidence your identity and residence. You’ll also need to provide personal and business details so the lender can check your business’s trading history and credit record.
Both types of loans work on the same principle: you borrow a sum of money and repay with interest over an agreed time frame. However, there are some key differences:
With an unsecured business loan, lenders don’t require an asset to provide collateral for the loan.
The lender is more concerned about affordability, so will need to scrutinise your business in more detail. The loan provider will want to assess your:
The commercial lender may also look at your personal credit history and assets. This is because unsecured lending is potentially riskier for the lender.
Interest rates on unsecured business loans are typically higher, and defaulting on payments may harm your personal and business credit record.
In comparison, with a secured loan the lender uses your business assets as security and is often able to offer lower interest rates and better repayment terms than you’d find with an unsecured business loan.
Commercial lenders are less concerned about affordability or business turnover because they are guaranteed to recoup any losses.
The disadvantage of a secured business loan is that it’s a more complex application process, so funds will take longer to obtain. Also, although it’s a safer form of lending for the lender - it's riskier for you and your business.
There are advantages and disadvantages of a secured business loan. Here are the primary considerations:
Asset finance: This type of lending lets you release cash from your fixed business assets such as machinery or current assets such as money owed by customers or stocks to be used as security to finance goods to generate income for your business.
Unsecured business loan: This type of business lending isn’t secured against property or a commercial asset, but affordability criteria are stricter, and a good trading and credit history is vital. This is ideal if you need a short-term business loan quickly without risking your business assets.
Working capital finance: This allows your business to borrow money up to an agreed credit limit. Interest is only paid on the balance owed, so it’s a simple way to solve cash flow issues. However, interest rates can be high, and a credit line could encourage overspending.
Invoice financing: This type of financing involves selling your unpaid invoices to an investor or broker who immediately gives the invoice's value to your business in exchange for a fee. It’s a flexible form of credit and allows a company to access money owed quickly.
Government Start Up loans: These are personal loans for new businesses that can’t get a traditional business loan, usually for established companies. You can borrow between £500 and £25,000 to start or grow your business. There are stricter eligibility criteria, but interest rates are low and come with free business mentoring.
The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.
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APR stands for Annual Percentage Rate. It’s the overall cost of the loan taking into account fees, broker costs, the standard or fixed variable rate and any introductory rates on a secured loan.
When comparing secured loans, it’s useful to look at the APR to get a true picture of how much the loan will cost you in total.
No, you won’t need a personal guarantee in most cases because the loan is secured against an asset. Due to the reduced risk, the lender is less likely to require additional security.
The exception may be for secured small business loans or in the case of a limited company. In this instance, the loan provider might also require a director’s personal guarantee as an additional form of security, especially if your credit history is poor.
A secured business loan should not harm your credit score if the loan is repaid on time and in full without any missed or late payments.
However, defaulting on a secured loan may cause problems for your business and impact your personal credit record.
Aside from the risks and penalties your business will incur if you cannot make payments, your business credit score will take a hit. Depending on the assets you've used to back your loan, your personal credit score could be impacted too.
For example, you'll be liable for paying off the debt if you’ve given a personal guarantee like your home as security and your business fails to make repayments.
A bad credit score means less favourable loan terms with higher interest rates. It may also impact your future financing and business dealings because many companies carry out credit checks on businesses before working with them.
Yes, it's easier to get a secured business loan than an unsecured business loan with bad credit. Your credit rating is less important to the lender than the assets you use to secure your borrowing because your collateral guarantees they will get their money back if you default on the loan.
Bear in mind, that your business or home could be at risk if you cannot make your loan repayments.
You may also find that a poor credit rating adversely affects the interest rate you're offered.
No, the Financial Conduct Authority (FCA) doesn't regulate secured business lending. However, the FCA covers financial services providers for related activities like secured home loans.
Some business lenders and asset finance providers are voluntarily authorised and regulated by the FCA.
