Secured business loans: What they are and how they work
Discover the pros and cons of using a secured business loan to access the funding you need.
If you’re looking for funding for your business, you might have considered a secured business loan. But how exactly do they work, and how do you know if they are right for your business?
These unsecured and secured loans could help you grow your business, cover running costs or even fund a new company.
Key takeaways
Secured loans require you to use an asset as security before you can qualify
These loans tend to come with more favourable terms due to the lower risk for lenders
Should you default on your loan, you risk losing the asset used as security
You can use a secured business loan for a range of business expenses
If you’re looking for funding for your business, you might have considered a secured business loan. But how exactly do they work, and how do you know if they are right for your business?
What is a secured business loan?
A secured business loan is a type of business financing that lets you borrow money by using an asset as security.
This security lowers the risk for the lender, meaning they can offer lower interest rates than unsecured loans. You can typically borrow a larger sum of money, too.
However, these loans are riskier for you as the borrower. Should you default on your loan, the lender can repossess your asset and sell it to recover its funds.
How do secured business loans work?
Secured business loans let you borrow a lump sum of cash that you then repay, with interest, in monthly instalments over a pre-agreed term – typically up to 25 years.
Lenders consider the value of your asset, as well as your business’s financial situation and credit history to help them determine how much you can borrow.
Most secured loans have variable interest rates, which means the amount you pay each month can vary if interest rates change. This makes it important to factor in the possibility of rates (and your monthly repayments) rising to ensure your loan would still be affordable.
Secured vs unsecured business loans
The key difference between secured and unsecured business loans is that secured loans require collateral, and unsecured loans don’t.
Lenders take on less risk with a secured business loan as they have the option of selling your assets to recoup their money if you can’t make your loan repayments. This means you typically benefit from more favourable terms, such as lower interest rates and higher borrowing amounts.
By contrast, unsecured loans don’t require collateral, so lenders tend to take a closer look at your business finances and credit history before deciding whether to offer you a loan. Because lenders take on more risk with an unsecured loan, these loans tend to come with higher interest rates. However, unsecured loans usually have fixed rates, so your repayments remain the same throughout the term of the loan.
Unsecured loans tend to offer smaller borrowing amounts and shorter terms, typically up to five years.
Advantages and disadvantages of secured loans
Secured business loans have a range of pros and cons that you should consider before deciding whether this type of business loan is right for you:
Advantages
Lower interest rates: You usually pay a lower rate of interest with a secured loan as there is less risk of the lender losing its money.
Larger borrowing amounts: You can typically borrow larger sums of money with a secured loan, although this partly depends on the value of the assets you use as security.
Longer repayment terms: You can borrow over a longer period of time – often up to 25 years. This can make monthly repayments more affordable, helping your business’ cash flow.
Credit history not as important: Because you must provide security, lenders focus less on your credit history, so you might find this type of loan easier to get if your company is new.
Disadvantages
Higher risk: Although the risk is smaller for the lender, it’s higher for you as the borrower. Should you default on your loan, the lender could take possession of your assets.
Higher fees: Secured loans often come with more charges, such as valuation fees and legal fees.
Longer application process: It typically takes longer to get a secured loan as your lender needs to value your asset before accepting your application.
Longer terms can be more costly: Spreading your loan over a longer repayment term can make monthly repayments more manageable, but you pay more interest overall.
What assets can you use for a secured business loan?
You can use a variety of assets as collateral for a secured business loan. Lenders usually accept both tangible and intangible assets.
Common tangible assets include:
Commercial property
Land
Vehicles
Machinery or equipment
Intangible assets refer to non-physical possessions and can include trademarks, copyrights, licences, intellectual property and patents. These can be more difficult to value.
Is my business eligible for a secured business loan?
As with all business loans, lenders consider a range of factors before deciding whether to offer you a secured loan. These factors can include the type of business you run, your trading history, your annual turnover, cash flow and profitability, as well as the stability and value of your assets.
Additionally, lenders look at your business credit report. However, you might find it easier to qualify for this type of loan if you have poor credit due to the security you must provide.
Business loan eligibility criteria can vary between lenders, so check it carefully before applying. Make sure you meet minimum annual turnover and trading history requirements. Also, be aware that some lenders might need to see your business plan to give them a better understanding of how your business operates and how you plan to use the money you borrow.
How much can you borrow with a secured business loan?
The amount you can borrow with a secured business loan partly depends on the value of the assets you use as security.
You can typically borrow up to 100% of the value of your asset, so if it’s worth £500,000, you could borrow up to that sum. Many lenders accept multiple pieces of collateral, which could allow you to borrow more.
However, lenders also look at your business financials and credit history to determine how affordable the loan is and whether you can comfortably repay it before deciding the final amount.
What can you use a secured business loan for?
You can use a secured business loan for a range of business expenses, such as:
Equipment and stock
New business premises
Hiring staff
Marketing and advertising costs
Boosting cash flow
Day-to-day running costs.
What you need to know before applying
Before applying for a secured loan, it’s crucial to consider whether your loan is affordable. Remember that if you fail to repay your loan, the lender has the right to take possession of your asset, so think about this carefully. Make sure you understand exactly how much your monthly repayments cost and whether you can realistically manage to pay this amount.
You should also note that if your business is a limited company or a limited liability partnership, your lender might ask you to provide a director’s personal guarantee as an extra form of security – particularly if a director has a poor credit history.
This means that at least one of the business directors must agree to act as a guarantor for the loan, becoming personally responsible for repaying the loan if the business can’t.
How to get a secured loan for your business
You can often apply for a secured business loan online by filling in an application form. However, the lender usually needs to speak to you over the phone to discuss your borrowing requirements, as well as the types of assets you plan to use as security.
It’s important to be honest and provide as much information as needed, as quickly as you can. This might include your business plan, account history and financial projections.
Lenders must consider this information carefully and usually value your assets before offering you a loan. The process can take several weeks to complete while the lender carries out the necessary checks.
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Paying back your secured business loan
If a lender offers you a secured business loan, make sure you have a solid plan in place to repay it. How you repay your loan should be set out when you make your loan application, and you should know:
The total amount borrowed
The total amount to repay
The term of the loan
The amount to repay (and whether that can change)
The due date of all your repayments
The interest rate and any fees
Making your repayments in full and on time can help to improve your business credit rating.
You can usually pay off your secured loan early if you can afford to, but be aware that high penalty fees might apply.
Secured business loan alternatives
If you’re not sure whether a secured business loan is right for your business, you can explore other options such as asset finance, invoice finance, unsecured loans, peer-to-peer lending, startup loans, and merchant cash advances.
Discover more about the different types of business loans to see whether one of these is more suitable.
About Rachel Wait
Rachel has spent the majority of her career writing about personal finance for leading price comparison sites and the national press, including for the Mail on Sunday, The Observer, The Spectator, the Evening Standard, Forbes UK and The Sun.