A secured business loan is one where the lender has asked for ‘security,’ before approving the finance. Security means the legal right to an asset of some kind should you not pay back the loan appropriately.
In this article we’ll explore secured business loans, what type of collateral may be appropriate, and what the likely charges are for this type of finance.
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How Do Secured Business Loans Work?
The loan application process for a secured business loan is fairly standard. Prospective borrowers make an application, offering their basic requirements:
- Loan Amount
- Duration of Loan
- Details of any Security Offered
Lenders will then assess the level of risk, checking credit scores, the value of the asset, and the reliability of the borrower. If their requirements are met, they will make an offer.
Criteria & Eligibility for a Business Loan?
Of course all lenders have their own specifics, but the preliminary criteria all providers are going to need is a healthy level of monthly turnover.
Lenders positively want to lend you money, since that’s how they run their own business, but they need a certain amount of confidence you’re going to be able to pay it back and that starts with turnover.
The credit score check is now a standard practice in the lending industries since it provides immediate data on the potential customers financial reliability.
It’s important to realise lenders will investigate both the businesses’ and the individuals credit ratings as part of their analysis. Although there is a clear legal distinction between personal and corporate finance, banks wish to understand the risks before they lend and, should a personal credit score come into question, they will be more cautious.
Aside from turnover and credit, the presence of a significant assets remains the biggest factor in your likelihood of getting the green light on a secured loan. If the business is too new or small to have its own, this is where directors may be asked to put personal assets on the line by signing a personal guarantee document.
What Can Be Used as ‘Security’ for a Business Loan?
Lenders will always prepare hard assets (cash, building and land etc) over soft (intellectual property) because they represent a greater security, in most cases.
Common hard assets include:
- Commercial machinery or equipment
What are the Advantages of a Secured Business Loan?
- If you have security to offer, you can borrow more
- Secured loans offer better rates than the more risky unsecured version
- If the loan is secured with a commercial asset, there is no need for directors to offer personal guarantees
- With an asset, the lender need place less scrutiny on credit scores or turnover, although it will still examine them to some degree
- Whatever security you offer could be at risk should you default on the loan
- Secured loans Take longer to obtain than some forms of finance
- This form of borrowing will not be available to you unless you have a suitable asset to stand as collateral
Securing a Business Loan with a Personal Guarantee
Where the business has no collateral of its own to offer, it is still possible to gain business finance via the use of a personal guarantee.
These documents allow a member of the company (often a director) to offer a personal asset (often a house) as loan guarantee. While these can be a useful means of securing finance, they are also a risky thing to put one’s name to since, should the business become insolvent, it can place your family house on the line.
We also recommend the use of personal guarantee insurance should your secured loan necessitate a personal guarantee.
Are Business Loans Regulated in the UK?
Where the loans are for limited companies, they are regulated by the FCA.
Individuals and sole traders can borrow from unregulated lenders, however.