Discover how secured business loans can help you and your company
Secured business loans give companies the chance to access much-needed funding by providing assets as a form of security. Our guide explains how they work and how they might suit your business.
Key takeaways
These loans can be used for various business expenses and often come with favourable terms due to the lower risk for lenders
Secured loans often have better terms, such as higher amounts and lower rates
The application process for secured business loans is longer due to asset evaluation, and there may be upfront fees
Alternatives like unsecured loans, invoice financing, and asset finance offer different benefits and drawbacks, depending on the company’s needs and financial health
What are secured business loans?
Secured business loans are a type of business financing that allows firms to borrow money by putting down assets as security.
This means that if you happen to default on your loan and can’t repay your debt, your lender has the right to repossess the assets you’ve provided as collateral and recover their funds.
You can use secured business loans to cover the cost of any business-related expenses from buying new equipment and tools to paying your staff and expanding your premises.
Secured business loans are often considered a low-risk lending option for lenders, meaning that you might be able to get access to better loan terms, such as access to bigger loans at more competitive interest rates.
Secured borrowing is often paid back over a longer term than unsecured business loans, but the loan application can take longer to be approved.
This is because the provider needs time to check that the security is in place and is of sufficient value to recoup in case the borrower defaults on repayments.
How do secured business loans work?
Secured business loans work in a similar way to other types of commercial loans, but require valuable assets and collateral as a form of security.
When it comes to deciding what type of assets you should put down, your lender may already have in mind what kind of collateral they need. This could range from valuable equipment and existing inventory to land and property.
Once you have researched possible lenders, determined your loan specifics, gathered your documents, and applied for financing, you’ll probably receive the money as a lump sum.
As with most loans, you’ll then owe interest on the total amount and make regular, monthly repayments until the loan is paid back in full.
Secured business loans work in a similar way to secured personal loans. But rather than the business funding being secured against personal assets such as your residential property, the collateral for the business loan will be a valuable item owned by the company, such as commercial property or high-value equipment.
What is the difference between unsecured and secured business loans?
Unlike unsecured loans, secured business loans need to be backed by some sort of collateral.
With secured business loans, lenders take on less risk as you’ve put down your commercial possessions as security. This means that you’re likely to benefit from more favourable terms, including higher borrowing amounts and lower rates.
Unsecured business loans could be a valuable option for new companies that don’t yet own any assets. Not only that, but the application for unsecured loans tends to be quicker, as lenders don’t need to spend time evaluating assets or collateral.
What are the advantages and disadvantages of secured business loans?
Secured business loans have pros and cons, such as:
Advantages
Larger loan amounts. Your company could borrow a larger sum of money because the amount available to borrow is partly determined by the value of the assets you decide to put down as security. The more valuable the collateral, the larger the amount of money you can borrow.
Lower interest rates. Since secured business loans are a lower risk type of business financing for lenders, it’s likely that borrowers benefit from a more affordable interest rate than they would with an unsecured loan.
Longer repayment terms available. Borrowers can often enjoy longer repayment terms, giving you the chance to budget and manage your loan better and allowing you to focus on growing and developing your firm.
Require a shorter trading history. Even if your company is relatively new and doesn’t have a long business track record, you may be able to get a secured loan because the assets put down as security give potential providers the confidence to lend.
Good credit history isn’t as important. In a similar way to not having a long trading history, your company may still be able to get a secured loan if it has bad credit or a less-than-perfect credit score because the lender knows it can seize the assets should repayments not be met.
Disadvantages
Your assets are at risk. You need to provide assets as security and you may end up losing the possessions you’ve put down as collateral should you be unable to repay your loan.
Longer application process. When applying for a secured business loan, it is likely you will have to wait longer for the process to be completed. This is because the lender will evaluate what you’ve put down as security before accepting the application.
You may have to pay fees. There could be charges to pay upfront, such as valuation fees and legal fees, before the loan is put in place. If the valuation of the assets don’t meet expectations, this could also mean your loan is declined.
Longer terms may cost more overall. Secured business loans often offer longer loan terms than unsecured loans, helping make monthly payments more manageable. However, this can result in paying more overall interest on the borrowing.
What type of assets can I use to get secured business loans?
There are many different types of assets you can use to secure your commercial loan. These are often divided into tangible and intangible assets.
Tangible assets are those possessions that are physical and can be touched. For example, these can be anything from property and land to equipment, vehicles, and stock.
Intangible assets stand for non-physical possessions, such as trademarks, copyrights, licences, intellectual property, and so on. These can be more difficult to value than physical assets and may only be considered by specialist lenders.
Does my business qualify for secured business loans?
If you’re hoping to take out a secured business loan, your company will need to meet specific eligibility criteria.
Lenders will often take into consideration a variety of different factors, including the type of business, trading history, and minimum annual income.
Some lenders will also ask to see your business plan, as it is likely to show how you’ll invest the borrowed money. Ultimately, all this information will allow the provider to understand and predict whether you’ll be able to pay back your loan or not.
The company you are borrowing the money for must also be located and registered in the UK.
How much funding can my company get with secured business loans?
The amount of money you can borrow is partly determined by the value of the assets you decide to put down as security.
For example, if you need to borrow £50,000, then you will need to put down assets that are worth that amount.
Just having assets worth the loan amount will not be enough. Lenders will also look at your company’s credit score and revenue to determine whether loan repayments will be affordable.
What are my alternatives to secured business loans?
If you’re looking for a cash injection for your business, there are other options to a secured business loan. These include:
Unsecured business loans
Like a personal loan, but for business. You borrow a lump sum of money and pay it back in regular instalments over an agreed period.
Advantages: Can be a quick way of borrowing necessary funds and you won’t need to put down security.
Disadvantages: Interest rates can be higher than on secured loans and you might not be able to borrow as much.
Invoice financing
A way of borrowing money against future income, where the finance provider pays a percentage of your outstanding invoices in advance.
Advantages: Can help with cashflow and reduce the wait for payment from slow customers.
Disadvantages: You’re effectively sacrificing a proportion of your earned income. Funding will also be limited by the valuation of the invoices.
Asset finance
A form of financing that enables businesses to acquire and use assets, such as equipment or vehicles, without the need for large upfront payments.
Advantages: Finance arrangements can be flexible and remove the need for significant lump sum payments so businesses, such as those working in heavy industry, can get up and running faster.
Disadvantages: Can result in higher overall costs due to interest payments and failure to meet repayments may lead to the repossession of assets.
Business lines of credit
A financing arrangement where businesses can access a revolving line of credit and interest is only charged on the amount used.
Advantages: Provides the flexibility to give you working capital as needed, particularly helpful if your company’s funding requirements are ongoing and difficult to predict.
Disadvantages: May come with additional fees and charges, higher interest rates for borrowing and the requirement of a personal guarantee for the lending from company directors.
Peer-to-peer lending
Online platforms connect businesses with individual or institutional lenders, offering an alternative type of loan to traditional banks.
Advantages: You may be able to achieve better rates than by applying to more traditional lenders.
Disadvantages: May not be available to companies with low credit ratings. May also be a lower limit to the borrowing and less flexibility in its terms.
Is it easier to get a secured or unsecured loan?
It can be easier to get the funds you need if you have assets to offer as collateral because the assets you present act as a guarantee and having a strong trading history or an excellent credit score becomes less important.
This can make secured loans a more viable option for start-ups who can’t show a track record of healthy accounts.
That said, it can also be more complicated to get a secured loan because the loan applications may involve a significant time investment, potentially taking weeks to access funds compared to unsecured lending.
This delay is attributed to the need for the lender to complete valuations and potentially arrange legal charges on property.
In either case your business will need to be registered in the UK and the loan provider will want to be confident that it can afford repayments before approving the application.
Other useful guides
We have a range of guides to help you learn more about business loans:
Search the market and find the right business loan for you
Lenders offer a wide range of secured business loan options and the easiest way to compare all the loans available in one place is by using MoneySuperMarket.
Simply tell us a little about your financial situation and what kind of loan you’re looking for, including what you’ll be spending the funds on. We’ll search the market and give you a list of competitive offers.
Once you’ve decided, you can click through to the provider and get the process started.
Author
Tim Heming
Personal Finance Expert
Tim Heming is a journalist and editor who has written about personal finance for national newspapers and consumer websites for 15 years. Tim enjoys providing no-nonsense information to help consumers...
