If you’re looking for funding for your business, a secured business loan might be an option you’ve thought about exploring. Secured business loans can enable you to borrow a larger lump sum than many alternatives, but there are also risks involved, as we explain.
A secured business loan is a type of financing that requires you to use business assets as security. Assets used often include commercial property, vehicles, land or machinery.
Using an asset as security reduces the risk for the lender as it’s less likely to lose money. Because of this effective guarantee, you can often borrow a larger sum of money over a longer period of time – known as the ‘term’. You’re also likely to get a better interest rate compared to an unsecured business loan.
However, it also means that if you are unable to keep up with your repayments, the lender has the right to claim ownership of the assets and sell them to recoup its money.
How do secured loans work?
Secured loans work in a similar way to most other types of loan. You typically borrow a lump sum of cash that you then repay in monthly instalments over a set term, with interest added on top. Secured loans can have either a variable rate of interest or a fixed rate.
Variable rates mean that your interest rate can move up or down in line with movements in the Bank of England base rate. Fixed rates, on the other hand, stay the same for the duration of the loan. Fixed repayments can make it easier to budget.
The amount you can borrow through a secured loan will depend on the value of the assets you’re using as security as well as your business finances.
Types of secured business loans
As well as standard secured business loans, there are other types of secured lending. These include:
Asset finance
This enables you to secure the use of assets such as equipment, machinery and vehicles, without paying for them upfront. The two most common forms of asset finance are hire purchase and lease financing.
Hire purchase lets you lease the item over a set term in return for fixed payments and a deposit. At the end of the term, you own the item outright. With lease financing, the lender buys the item and then you rent it back for a fixed monthly fee. At the end of the term, you might be able to continue renting, buy the item for an agreed price, or return it.
With revenue based financing, you receive a lump sum in exchange for a percentage of your future revenue. You usually repay the loan in monthly instalments, but the amount you pay each month will be linked to how well your business is doing. You pay more in months where business is booming, and less during months when sales have tailed off.
Invoice financing is a way of borrowing money based on what customers owe you. Instead of waiting for invoices to be paid, a third party advances you a large percentage of the invoice value upfront, often up to 95%.
The invoices act as collateral and when they are due, the third party collects the money from the customer and then pays you the remaining balance minus fees and charges.
Peer-to-peer lending cuts out the middleman (i.e. the bank) and enables you to get a loan from other individuals or businesses. The idea is that it matches people who want to borrow money with those who want to lend it. Interest rates tend to be more competitive for borrowers, while lenders also get better rates than they would with a traditional savings account.
Although many peer-to-peer lending platforms offer unsecured loans, some also offer secured loans, whereby you’ll be asked to use an asset as security.
Some high street banks will offer secured business loans, but you’re likely to have better luck with a specialist lender, many of which can be found online.
Make sure you shop around and compare lenders carefully to check you’re getting the best deal for your business.
How to compare secured business loans
When comparing secured business loans, it’s a good idea to keep the following points in mind:
Minimum and maximum borrowing amounts. Check how much each lender is likely to let you borrow to see if it meets your requirements.
The interest rate. Rates will vary depending on the lender and ideally you want to find the lowest rate possible. Remember to check whether the rate is fixed or variable.
The repayment term. Also check how long you’ll have to repay your loan. Longer loan terms mean your monthly repayments will be lower, but you’ll also pay more in interest overall.
Eligibility criteria. It’s important to check the eligibility requirements to make sure you qualify before you apply. There’s no point applying for a loan you have no chance of getting. Some lenders will have minimum trading and revenue requirements.
Fees. Check whether there are any arrangement fees, valuation fees or early repayment charges and how much these are.
Pros and cons of secured loans
Pros
Interest rates are often lower compared to unsecured lending
You can usually borrow a larger sum of money compared to unsecured loans – the exact amount will depend on the value of the assets used as security
You can repay your loan over a longer period of time which means your monthly repayments will be lower
You might still qualify even if you have a limited trading history and credit history
Cons
You’ll need to have suitable high value assets to use as security, so it won’t suit all businesses
If you can’t repay your loan, the lender can sell your assets to get its money back
Longer repayment terms can make it more expensive overall
It can take longer to arrange a secured loan as assets will need to be valued
What are the risks of secured business loans?
The main risk of a secured business loan is that you could lose the assets you’ve put up as security. If you are unable to keep up with your loan repayments, the lender has the right to claim ownership of your assets and sell them to recoup the cost of the loan.
If you’re worried about missing repayments, talk to your lender as soon as possible. Your lender might be able to work with you to come up with a more affordable repayment plan.
Who is eligible?
Eligibility requirements for a secured business loan are often more relaxed compared to unsecured loans. However, exact criteria will depend on the lender. Your business will usually need to have been trading for at least three months and be registered in the UK.
Your business credit history will also be looked at, but if you have poor credit, that doesn’t necessarily mean you’ll get turned away. Instead, lenders are more likely to focus on the value of the assets you’re using as security and what you plan to use the loan for. The higher the value of the assets, the greater the chance of being accepted. However, you will still need to be able to demonstrate you can afford to repay the loan.
Repaying a secured loan?
You repay a secured business loan in monthly instalments over the agreed term. Each month you’ll pay back a portion of the amount borrowed, plus interest. If your loan has a fixed interest rate, your interest payments will remain the same for the term of the loan.
Some secured loans will allow you to make overpayments without incurring a penalty fee – however, the amount you can overpay by might be restricted to say 10% of your outstanding loan balance. If you pay off more than this, you might have to pay an early repayment fee so check the small print carefully.
Alternative types of business funding
Secured loans are just one option when it comes to borrowing money for your business. You could also consider the following:
An unsecured business loan. You won’t need to use assets as security, making it the less risky option. But it does mean you won’t usually be able to borrow as much and interest rates can be higher than with secured loans. You might also need to sign a personal guarantee. This means you’ll be personally liable for repaying the loan if your business can’t.
A business credit card. This will give you a flexible line of credit that you can draw on as and when required. You then pay back the amount borrowed in flexible monthly repayments. Some credit cards also offer perks for your business, but bear in mind that interest rates can be high if you don’t clear the balance each month. You also won’t be able to borrow as much as you can with a loan.
A business overdraft. If you have a business bank account, you might be offered an overdraft with it. This can be useful if you only need to borrow funds from time to time as you can dip into it as required. This should only be used for short-term borrowing though as interest rates can be high.
Bottom line
Secured business loans can provide valuable funding to help you buy a new business premises or new equipment, for example. You’ll typically be able to borrow a larger sum of money compared to an unsecured loan and repay it over a longer term. However, the risks are higher compared to unsecured business loans, so it’s crucial to ensure your loan is affordable before you agree to anything.
Frequently asked questions
When you take out a secured business loan, you’ll be required to offer an asset such as commercial property or machinery as security against the amount you need to borrow. This means that if you cannot repay the loan, the lender can sell the asset to get its money back.
The interest rate you’ll be offered will depend on a number of factors including the amount you’re borrowing, the length of the term, and the size of the loan in relation to the value of the assets you’re using as security. The smaller the loan as a percentage of the assets, the more competitive the interest rate will be.
You can use almost anything as security, provided it has value. But typical assets used include commercial property, commercial vehicles, valuable machinery or land. With certain secured lending, you can also use assets such as invoices or unsold stock.
To decide how long you need to repay your loan, you’ll need to work out how much you can comfortably afford to repay each month. The longer the loan term, the lower your monthly repayments will be. But this also means you’ll pay more interest overall, making it more expensive.
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Rachel Wait is a freelance journalist and has been writing about personal finance for more than a decade, covering everything from insurance to mortgages. She has written for a range of personal finance websites and national newspapers, including The Observer, The Mail on Sunday, The Sun and the Evening Standard. Rachel is a keen baker in her spare time. See full bio
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