A guide to secured business loans
In this guide, we detail what a secured loan is, how secured loans work, how they differ from unsecured loans, their advantages and disadvantages, information about the types of businesses that can apply for secured loans, and finally, how to apply for a secured loan with OakNorth.
Part of the wider group of debt finance options and one of the most common types of debt financing solutions for businesses, secured loans enable businesses to access debt by offering an asset as security against the amount they borrow. This asset is typically referred to as “collateral” and helps mitigate risk for the lender if the borrower isn’t able to repay the loan.
Assets that can be used as collateral, include hard assets such as: real estate, cars, and machinery, or soft assets, such as: stock, debtors, and intellectual property. Some institutions accept luxury assets such as fine wine and art as collateral, and others are now even considering crypto assets such as Bitcoin and Ripple.
Secured loans for businesses work in a similar way to personal loans, such as mortgages. Borrowers will be charged a pre-agreed amount of interest by the lender and will then be required to repay it – typically on a monthly basis for the term or life of the loan until the debt is repaid. The interest rate on a secured loan tends to be lower than for a personal or unsecured loan, which is considered to be riskier.
Most secured business loans will come with a variable rate, meaning business owners should factor in the possibility of rate rises when they’re working out how much they can afford to borrow. It is also important to note that the advertised rate isn’t necessarily the one you’ll receive, as the rate you’re offered may depend on how much you want to borrow, in addition to how long for, and the value of the collateral you put forward.
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This key difference between a secured loan and an unsecured loan is that unsecured loans don’t require any collateral, with common examples including: credit cards, personal loans, and student loans. As a result, unsecured loans are considered higher risk for lenders and tend to therefore carry a higher interest rate.
It is however important to realise that the term unsecured loan can mean different things to different lenders. There are two main definitions that are used in the industry:
Completely unsecured lending: A loan that is not secured by any assets or collateral. This can be riskier for both parties because if the borrower cannot repay the loan, their business would need to be sold as a ‘going concern’ to repay the outstanding debt.
Lending not backed by tangible assets: Loans that are not secured against tangible assets but are secured against a business’ cash flow and the agreed loan covenants.
They allow businesses to borrow larger amounts of capital: As the loan is secured against collateral, businesses are able to borrow larger amounts of capital, compared to unsecured loans.
As a business is able to offer collateral as security which can reduce the loss and risk for the lender, secured loans tend to have lower interest rates than unsecured loans.
It can be simpler for a business to get a loan approved on a secured loan (even if it has never taken out a business loan before), because by providing collateral as security, the business reduces the risk for the lender making it easier for them to find a path to “yes”.
Businesses will normally have the option to pay back their loan to the lender over a longer term when compared with unsecured loans.
Much like other types of business loans, there are of course risks involved. If a business defaults on its agreed repayment schedule, the lender has the right to secure the collateral that the loan was taken out against in order to recover the debt.
For a business to secure its loan against something, it will of course need the asset in the first place. If the business doesn’t have suitable assets, then it’s likely that it will need to consider another type of business funding such as an unsecured loan.
It’s likely that the lender will require businesses to pay valuation fees and legal fees if they place a legal charge on the collateral used to secure the loan. If a valuation comes back for less than the business had anticipated, it could impact how much they’re able to borrow or even mean their loan application isn’t approved.
Accessing funds from a secured loan will often take longer when compared to other types of financing, due to businesses having to wait for the lender to complete due diligence.
If a business is looking for debt finance to grow and has the collateral to provide as security, then it is eligible to apply for a secured business loan. As the business needs to be able to meet its repayment obligations, it tends to be a more attractive option for businesses that have turned a profit.
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Borrowers will normally be able to borrow more with a secured loan compared to an unsecured loan. With secured loans, you can borrow up to 100% of the value of the collateral you’re using as security, with various lenders also willing to consider the net value of multiple pieces of collateral, such as those mentioned earlier in this guide.
The amount a business can borrow from a lender will also be impacted by its financial strength, such as its profitability, credit history and any existing debts.
Secured loans are typically secured against a high-value piece of collateral and as a result, lenders have the reassurance that if things go wrong and a business is unable to keep up with repayments, the lender can take the collateral to cover its losses. In the case of a limited company or a limited liability partnership, it’s common practice for lenders to request a director’s personal guarantee as an additional form of security. This means that one or more of the business’ directors will need to commit as a guarantor for the loan. A director’s personal guarantee is made more likely if the credit history of the company director is poor.
As noted earlier, secured loans for businesses can come with risks, so the decision to take one out should not be rushed or taken lightly. A key consideration for business owners should be their financial capabilities – how much can they afford to borrow? How much will they need to repay each month? How will the capital be effectively deployed to support the business in achieving its growth ambitions?
At OakNorth, we offer fast, flexible debt finance – including both secured and unsecured loans with the success of your business in mind. With secured business loans ranging from £250,000 up to tens of millions of pounds, we provide capital that caters to your growth plans, without you needing to give up any equity.
Applying for a secured loan with us is easy: all you need to do is fill out this short online form, and a member of our lending team will get back to you.
We provide fast yes or no answers to help you get funded faster. And rather than offering off-the-shelf solutions, our business loan specialists can help you build a flexible loan facility that supports your future ambitions. For loans of a certain size, you’ll even be invited to meet our Credit Committee to discuss your business growth with key decision-makers.
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