Secured Business Loans

What is a secured business loan?

Secured business loans are issued by business lenders to entities with business assets e.g. commercial property, plant, equipment, inventory, or other valuable assets. These company assets collateralise the debt, in much the same way a house is collateralised by a personal mortgage.

Alternatively, if the business doesn't have these types of collateral, the shareholders and/or company directors can pledge personal assets, such as their residential property to collateralise the loan.

The assets are normally tangible (physical assets) but some examples of intangible assets can be used. e.g. a transferable fishing license or transferable rights to future royalties. Specialist lenders may also consider using work in progress (WIP), bills of exchange, accounts receivable, or even accrued revenue (in some cases).

Ultimately, it's up to the lender to decide if you have a suitable asset for this type of asset-backed lending.

What can be used as collateral for a secured business loan?

The objective is for the lender to recover their loan capital, outstanding fees, and any costs of recovery, from the sale proceeds of the collateral in the event of a default.

With this objective in mind, two qualifying characteristics emerge:

  • The disposal value of the collateral should be sufficiently more than the loan value
  • There must be a secondary market or achievable route to sale

The reason most levels of funding don't exceed 70%-80% of the value of the assets (LTV) is due to the first point.

The second point may seem obvious but, I must address it. The "value-in-use" and the historic cost may be significantly higher than the realisable value that the lender is concerned with. This is highlighted when considering non-transferable or non-secondary market intangible assets, such as much of your intellectual property.

Don't be surprised, or offended when lenders don't value certain assets highly, vs their value-in-use or cost.

There isn't a legal definition of what a secured loan is but, in the U.K., it is taken to mean business debt secured by way of a charge and/or in some cases, a personal guarantee (PG).

A legal charge is a document filed at Companies House. It can be:

  • A fixed charge
  • A floating charge
  • A share charge

It can also be a first charge, second charge, third charge, ad infinitum. Definitions for these types of legal charges can be found in my business loan jargon guide.

Any legal charge holder will need to consent to another legal charge holder to sit behind them.

Unlike a legal charge, an equitable charge does not give the charge holder (the lender) the power of sale over the assets under said charge.

Advantages of an equitable charge vs a legal charge are:

  • They are quicker to process than legal charges
  • If a legal charge is not available an equitable charge can help facilitate this funding solution.

Who Qualifies for secured business loans?

From a security perspective, the lender will need to be comfortable with:

  • The valuation of the asset to be collateralised
  • That it is your property

If your business has assets that you don't hold the title over e.g leased equipment, you will not be able to raise secured debt against them.

The lender will also have other loan criteria and aspects they like or dislike. For some common examples please check out my guide on a good business loan application.

Many types of business qualify for secured loans including:

  • Limited companies (Ltd)
  • Publically limited companies (Plc)
  • Limited liability partnerships (LLP)

Sole traders and unlimited partnerships are different in the sense that the legal identity is not the business, it is the individuals. I'm going to consider funding options for these types of business as personal loans, rather than secured business loans.

What to Expect from a secured business loan

The market is well established for secured business loans. It is arguably the most vanilla and easy-to-understand type of business loan.

The application process may take longer than other forms of credit. The bank or alternative finance provider will need to have valuations made of the asset so being organised is crucial.

When collaterising long-life high-value assets business owners can expect the loan term (the period of time the loan covers) for secured business finance to be the longest loan type available. A longer repayment period is an advantage if your cash flow is tight as the monthly payments will be less than a shorter-term loan.

You should consider cash flow implications carefully when making any decision on loan term as monthly repayments will need to be affordable. You should also understand that total interest will be higher over a longer period.

Many lenders will ask for personal guarantees from Directors but some lenders do not require PGs for this form of finance.

The advantages of secured business loans

  • A wide range of assets can be considered acceptable collateral for this type of commercial loan
  • A cost-effective cash injection has a multitude of uses
  • Possibly the best way to leverage valuable business assets such as a business premises
  • A company director or shareholder can offer personal assets including personal property
  • This type of finance can be convenient for start-ups that have security
  • Less expensive than an unsecured business loan
  • Longer loan terms available, particularly vs an unsecured loan
  • Lower interest rates can mean lower monthly installments
  • Larger sums of money available for lending than other forms of business lending
  • Typically, the maximum loan is up to 80% of the value of the asset but, some business loan providers can go as high as 100%
  • The business plan doesn't need to be as extensive as for other forms of lending
  • A strong market with a range of lenders competing means competitive interest rates
  • This type of funding can be suitable for the recovery loan scheme
  • Flexible terms can be arranged
  • Poor credit history or poor credit score aren't necessarily barriers to this form of business borrowing

The disadvantages of secured business loans

  • The risk of repossession should be considered carefully for both business and personal assets
  • If you don't service the loan correctly your credit rating may decrease
  • If the deal requires property valuations it may take longer
  • The loan application may be more time consuming to prepare than other forms of finance
  • You may incur the extra cost of administration fees