About Secured Business Loans
Loans secured against business assets
When seeking a business loan, you will have to decide whether a secured or unsecured loan best suits your business and financial needs. Typically, the secured loan is popular amongst banks and financial institutions. These types of loans minimise the risk of financial loss to the lender. There are many funding options available to businesses such as business credit cards, peer to peer lenders, and online start-up business lenders and unsecured loans. However, if your company typically invests heavily in fixed assets such as property, machinery or vehicles, then a secured loan may be the ideal option for you.
What is a secured business loan?
Secured business loans are loans which are offered by financial institutions primarily, but not exclusively, banks. These loans can be used for the establishment of the business (for the start-up), for sustainability of the business, for staffing, or for expansion of the organisation. Secured loans require that the applicant have assets which can be used as collateral on the loans, should the applicant default on the terms of repayment.
Secured loans, also known as asset-backed lending, help to reduce the risk for the lender. This means the lender will be able to see their money returned to them even if you cannot pay back the loan. They will have the legal right to the property or asset that you put forward as security. When considering a secured loan, your business needs to decide whether you can risk losing that specific asset if you cannot keep up with loan repayments.
What are the average loans offered?
The amount of lending is dependent upon the institution/investing party. Most banks which offer secured loans will lend a minimum of £1,000 with the maximum loans around £10 million, depending on the asset value. Typically, the loan will cover from 80% - 100% of the value of the asset that you put forward. Lenders may accept stock, property, land, inventory, and personal assets as securities upon the loan. Each lender will accept different assets as security, so it is essential to check what you can use.
Secured business loan basics
Secured business loans will usually have a fixed period and repayment term. This will often depend on the amount you are borrowing and how much you can afford to pay back each month. Average repayment terms can be anywhere between 18 months and 25 years. However, some lenders will offer shorter and longer repayment terms depending on the needs and asset.
With many different lenders, you can expect widely variable APR, usually between 4-20%. You will need to find a competitive price to make sure you get the maximum value from your loan. It is always worthwhile comparing the lending market or using a broker to scour the market and find the best deals for your business.
In some cases, lenders will ask for a personal guarantee as well as the security of the asset. This will mean a director of the company will have to take on personal responsibility using their own finances or assets. This will add to the security of the lender that they will be able to recoup their costs.
Perhaps the most significant advantage of the secured loan is that they are easier to come by then the unsecured loan. Unsecured loans do not have assets, and the lender is more at risk for a loss should you default on the payment. Secured loans are either covered by the assets of the business, or in some cases, an individual. Consequently, there is less of a margin for financial loss in a secured loan than in an unsecured loan. As such, the APR and monthly interest on secured loans can be as low as 2 to 5%.
Secured business loans allow you to borrow more substantial amounts than many other types of business funding, with usually a more extended repayment period. Lower APR and longer periods to pay back the loan mean that repayments are generally lower which makes the loan more manageable for businesses. As well as this, secured business loans will often accept borrowers with a less than perfect credit history, because they have an asset to use as collateral.
The disadvantage of the secured loan is that they are asset driven, meaning that the business receiving the secured loan has a higher risk of losing it all, should the loan default. Secondly, the organisation must have assets which are worth the value of the loan.
For a start-up company, a secured loan may be quite challenging to achieve. In many instances, start-up businesses go outside of the business assets and use personal property and assets as collateral on the loan. While this may gain a sizeable investment for the business, it may jeopardise the property and credit of the person seeking the loan if the loan is repaid or defaulted.