By accessing a business loan, additional finances can be obtained to enable a business owner to expand their business operations or secure an asset.
Business owners will find a range of financial products available on the market, however, the value and terms available will likely depend on the circumstances of the loan applicant as well as the linked asset.
In this guide, we will explore secured business loans in further detail including reviewing the benefits of obtaining secured finance as well as looking at the application process.
What is a secured business loan?
A secured business loan is the method of borrowing capital finance by providing details of an asset to be used as security to the lender.
Should a business owner have a commercial asset to secure lending against such as a tangible asset like property, machinery, vehicles, equipment, land or commercial or personal assets, they may be able to access a high-value business loan of up to £2 million.
The asset provides security and in turn, reduces the risk to the lender, therefore depending on the value of the asset, can enable more favourable loan terms.
However, business owners should be aware that should an unforeseen event take place which impacts the ability of a business owner to keep up the loan repayments, there will likely be repossession consequences of the asset linked to the loan.
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Benefits of secured business loans
The process of securing a loan against an owned asset will often provide a number of advantages to the business borrower such as:
- Enabling larger loan values – As discussed, by securing the borrowing against an asset, the lender reduces their risk and therefore may be willing to lend higher values.
- Offering longer repayment terms – Typically, secured lending will enable longer loan terms, which can reduce the value of monthly loan repayments and enable business owners to budget over a longer period of time, sometimes up to ten years.
- Lower interest rates – Secured loans typically have lower interest rates applicable versus unsecured loans, and therefore can keep the value of monthly loan repayments lower. Commonly, the interest payable on a secured business loan is fixed throughout the duration of the loan, which can aid the cash flow of a business as the flat repayments are known as consistent.
- Enabling even business owners with bad credit records – Secured loans can even be suitable for business owners with a poor credit history.
How do secured business loans in the UK work?
As with any financial product application, there will be an application process, followed by the proposed lender analysing the application. The process of applying for a secured business loan can be similar to applying for a mortgage and therefore documents will need to be made available to confirm identity and business income.
Before making a secured business loan application, in addition to finding copies of the necessary documents, a business owner should consider the following elements:
- Deciding which asset to commit to the secured lending.
- Select an ideal total amount to borrow.
- Choose a loan term.
As already discussed, an application for a secured business loan will be linked to an asset and therefore during the application process, a valuation of the said asset will need to take place.
Once these initial critical elements have been decided, the market can be researched to find a suitable lender and financial product, at the most favourable terms.
The loan value offered, and terms will vary depending on the circumstances of the business owner, the business and the asset offered as collateral. However, as a rough guide, it is common for lenders to offer a loan for up to 100% of the asset value secured to the lending.
How much can I get?
The amount you can borrow will depend entirely on the value of the asset you put down, but the majority of lenders will offer 100% of the value of the asset. For example, if your property is worth £200,000, you will usually be able to acquire a secured business loan of £200,000.
Will my business qualify for a secured business loan?
Typically, the criteria to obtain a business loan is as follows:
- Be a UK registered business either as; a limited company, a limited liability partnership or as a sole trader.
- Be based within the UK.
- The business must have been trading for a least three months before the application is made.
If the business owner applicant operates as a limited company or limited liability partnership, they may be required to supply a personal guarantee as well as the asset for security. In addition, some lenders may also require a fully detailed business plan as part of the application process.
It is highly recommended that a business owner approaches a financial broker to assist with the application process for a business loan, as well as exploring the market to find the most suited financial product, at the most favourable rates.
What types of collateral can be used to secure against the loan?
The majority of lenders will consider a range of different tangible and intangible business assets to secure the loan against. Some of the most commonly used assets include the following:
- Personal assets
- Commercial assets
- Vehicles and machinery
Certain lenders will also accept a pool of different assets, for example, a property, a vehicle and a business to put down for a secured business loan.
Can I obtain a secured business loan against my house?
Should an existing mortgage be in place on an asset that a business would like to use as collateral against a new business loan, it is still possible to proceed. In such circumstances, the lender may register a legal or equitable charge on the asset. The differences between these two charges are a follow:
• Legal Charge – This type of charge grants the lender the legal power of sale of the linked asset should the loan repayments not be maintained. It is worth noting that consent may be required from any existing lenders against the asset, such as a mortgage provider and therefore there can be some delay in the process for the lender to recoup funds.
• Equitable Charge – It is commonplace for business loan lenders to opt to register an equitable charge against an asset as security as part of the loan process.
An equitable charge does not provide a lender with the power of sale over an asset, however, should there be repayment issues, the lender can seek approval for the charge to be granted and then the funds can be released very promptly, sometimes in a matter of hours.
Although an equitable charge does not provide a power to force the sale of the asset, it also does not require consent from any other lenders involved and therefore can be a much quicker process.
Are my assets at risk?
Yes. The asset you use to secure the loan may be lost if you fail to meet the repayment terms outlined in your lender’s contract. The lender will then typically sell the asset to reclaim the remaining debt.
What if I don’t have any business assets?
If you don’t own any assets or lack what’s required for a secured business loan, you can explore alternatives such as an unsecured business loan.
Secured Business Loans Summary
Secured business lending can open up an array of opportunities to business owners, whilst providing a fixed cost repayment plan. As we have discussed, this type of funding is secured against an asset and therefore this would be subject to repossession should the loan repayments not be maintained.
Call us today on 01925 906 210 or contact us. One of our advisors can talk through all of your options with you.