A secured business loan is a type of business loan that is backed by security provided by the business.
Security, or collateral, for a secured business loan is an asset of value, such as property, machinery, or vehicles. The borrowing business pledges these assets to the lender to get the loan. If the business is unable to repay the loan, the lender has the right to seize and sell the assets to recover the outstanding debt.
Secured business loans are considered less risky for lenders because they have a tangible asset to fall back on if the borrower defaults on the loan. This reduced risk often results in lower interest rates and more favourable terms.
Bear in mind that while secured business loans can provide access to larger loan amounts and better terms, there's also some risk involved. If the business is unable to meet its loan repayments, it could lose the asset used as collateral.
Secured business loans are suitable for any businesses that own any property, or have assets of any value on their balance sheet, such as vehicles, or plant and machinery. Secured business loans can also be used for businesses whose director owns property or assets of value.
A secured business loan works by using an asset as a means for a business to access more cash. The value of the asset you want to use should be sufficient to cover the amount you want to borrow.
When you apply for a secured business loan, the lender will carry out a valuation of the asset to ensure that it would cover the loan amount in case the lender needed to sell the asset if the business defaults.
The lender will also likely require some documentation such as your business bank statements and financial statements, as well as checking your business credit score.
Once approved for a secured business loan, you will receive the funds into your business bank account. You will then start to repay the secured business loan, including any interest and arrangement fees, usually on a monthly basis.
Once the loan is repaid in full, you will retain full ownership of the asset.
If you were unable to repay the loan according to the agreed-upon terms, the lender does have the right to take possession of the collateral and sell it to recover the outstanding debt. This process is known as foreclosure or repossession.
Secured business loans can be used for various purposes. Here are some common uses for secured business loans:
An advantage of a secured loan is that it can be a great option for businesses with poor credit. As the loan is secured against an asset, the lender should be able to recover the funds, even if a business defaults. This means the strength of the business’ creditworthiness is less significant and you could get a secured business loan with bad credit. However a bad credit score would subject you to more expensive rates, so it is good practice to try and build a good business credit score where possible.
A secured business loan uses high value assets as collateral. This could be a commercial property, a residential property, a fleet of vehicles, or equipment. Soft assets, such as computers or desks, will not hold enough value long term to be used as security for a loan.
The difference between a secured business loan and an unsecured business loan is whether the loan has any collateral for the lender to sell in the case of default. An unsecured loan is typically more expensive and businesses cannot borrow large amounts due to the higher associated risk.
With a secured business loan, you typically can borrow the same amount as the value of the asset you are securing against.
If the borrower defaults on a secured loan, the lender will assess the value of the collateral to determine how much of the outstanding debt can be recovered from the sale of the asset. If the collateral's value exceeds the outstanding debt, the excess amount is returned to the borrower.