Secured Business Loans
Secured business loans are available to all types of businesses that require finance and have an asset to offer as security.
A lender will lend an amount based on the business asset you use as security. In the event of the business not paying the loan, the lender can sell the asset to recover the funds.
Secured business finance can be complicated and sometimes takes a long time to arrange.
What Is A Secured Business Loan?
A secured business loan where you are using the funds for business purposes.
Secured business loans work based on the company offering a tangible asset as security, such as:
Multiple assets can be offered, including assets such as your home. This type of secured lending is also known as asset-backed lending.
If you are a director offering a personal guarantee and offering your home as security, you need to be aware that if repayments are not made, you could lose your home.
Businesses typically raise finance to:
Buy additional or larger premises
Recruit additional staff
Buy additional stock
Secured Business Loan Advantages
With a secured business loan, you can borrow more significant amounts, in some cases up to 100% of the net value of the asset being offered as security. Many people consider this a good financing option.
Lower interest rates
Business loans that require security usually have lower interest rates than unsecured loans and other types of finance. The lender's risk of losing their money is less because they can recover the money lent by selling the asset offered as security.
Longer repayment terms
Long repayment terms assist in cash flow because the longer the loan term, the lower the monthly repayment. The only downside to a long-term loan is that if you keep the loan for the entire term, you will have to repay a high amount of interest.
Less focus on credit history and trading record
Lenders tend to be more flexible when assessing a company’s track record and credit score.
Knowing that they have security in the form of an asset, lenders may look to lend where the company has traded for a short time or has a less-than-perfect credit rating.
Secured Business Loan Disadvantages
Risk to your assets
To get a secured business loan, you are required to offer assets as security to the lender. If you don’t want to risk losing your assets, a secured business loan might not be your best option. If you sign a personal guarantee, the lender will likely secure the loan against your property, taking a legal charge against said property.
With a secured business loan, the fees can be very high.
In addition to paying an arrangement fee, you will likely have to pay for the cost of a valuation and legal fees. The cost of valuing a factory unit is normally considerably higher than the fee for valuing someone's residential home.
The valuation cost and legal fees will still be incurred even if the loan doesn’t proceed for whatever reason.
Not fast to arrange
When an asset is being taken as security, it often requires additional due diligence in the form of a valuation. The time from instructing the valuation to receiving a fully completed report could take four weeks or more.
Depending on the time of year, it may take considerably longer, such as school holidays where valuers may be on holiday.
To help the process be as quick as possible, you should have all your business-related papers together and inform your accountant that you are applying for a loan.
Unsecured versus Secured Business Loans
With an unsecured business loan, you are not required to offer any type of security.
As a result, any lender will look very closely at your application and pay attention to your credit rating and trading history. They will want to know if you can make the monthly repayments as you are not offering any security. If you do not pay, they may have to write off the debt.
Unsecured business loans could be appropriate for businesses without assets or prefer not to offer an asset as security.
With a secured business loan, where the amount you can borrow is determined by the value of the asset offered as security – the amount you can borrow with an unsecured option will typically be a multiple of your annual business turnover.
While the interest rate with unsecured lending will be considerably higher because no asset valuation is required, you are likely to get the funds much more quickly than with a secured business loan.
Secured business loans attract lower interest rates and have longer repayment terms as the risk to the lender is considerably less. In addition, the amount that you can borrow can be significantly higher depending on the value of the assets you offer as security.
If you apply for a secured loan, remember the longer the loan term, the more interest you pay back.
Second Mortgages for Business Purposes
Several second mortgage lenders are prepared to lend for business purposes.
While most of the loans they write fall under the Financial Conduct Authority (FCA) regulation, loans of £25,000 and more used for business purposes fall outside FCA regulations.
To get a second mortgage, you must use your main home or a buy-to-let rental property you own as collateral.
The property you are offering as security should already have a mortgage secured against it.
Lenders will consider three main factors when determining if they are prepared to lend to you.
The equity in your home. The equity is the difference in the value of your property and the mortgage balance outstanding against it. Most lenders lend up to 75% of the value of your property, with some lending more.
Your ability to maintain payments. Lenders will conduct a detailed assessment to ensure you have enough income to service the loan. It's essential you can afford repayments; otherwise, it can result in losing your home.
Your credit rating. You need to have a good credit rating to benefit from a low interest rate. If you have a low credit score, you may not be able to raise finance, or if you can, the interest rate is likely to be high.
On completion of a successful application, a lender will transfer the loan money directly into your bank account.
If you have difficulties repaying the loan at any time, you must contact the lender at the earliest opportunity to let them know. They may be able to put a plan in place whereby you make reduced repayments for a period, or they extend the term of the loan, resulting in a lower monthly repayment.
For more advice about secured business loans or second charge mortgages, contact our team of experts today.