A secured business loan is a type of financing where the borrower uses an asset, such as property, vehicles, or equipment, as security for the loan. If the borrower defaults, the lender can seize and sell the asset to recover the debt. This added security reduces risk for lenders, making it easier to access larger sums, lower interest rates, and longer repayment terms than with unsecured lending.
As a result, secured loans are often used by businesses looking to finance significant investments, including buying property, acquiring machinery and equipment, or expanding operations. From manufacturing and building to logistics and retail, secured lending is usually a first choice for businesses with strong assets on their balance sheet.
This article explains how secured business loans work, when they are best used, how they compare to unsecured loans, and how you can get one in the UK.
How do secured business loans work?
When applying for a secured business loan, you’ll be asked to offer an asset as collateral.
This could be:
- Commercial property
- Vehicles
- Plant machinery
- Stock or inventory
- Accounts receivable
The lender will value the asset to find out how much it is worth, as well as the loan-to-value (LTV) ratio – how much they will lend against the asset. For example, if a building is worth £500,000 and the lender offers 60% LTV, you can borrow £300,000.
Subject to acceptance, the loan payment will normally be made as a lump sum. The monthly or quarterly repayments will be made, including both interest and capital. Because the lender has security, they are able to provide more favourable terms: reduced interest rates, greater amounts lent, and longer repayment periods.
However, if you are unable to pay, the lender may repossess and sell the property. This is the biggest risk of secured lending – one you need to consider carefully.
Secured vs unsecured loans
In determining which financing option is best for you, we need to understand the difference between secured and unsecured loans.
Secured business loans require you to pledge an asset as a security. This reduces the level of risk for the lender, allowing:
- Decreased interest rates
- Borrowing limits increased
- Longer repayment duration
- Easier access for businesses with imperfect credit
Unsecured business loans do not require collateral. Unsecured loans rely on your credit history, buying and selling history, and the quality of the application. While this does mean you don’t risk losing an asset, unsecured loans typically:
- Bear higher interest rates
- Offer lower lending limits
- Have stricter eligibility criteria
If your business lacks valuable assets or needs a fast, short-term loan, unsecured lending may be the better option.
Alternatively, if you have the assets to pledge and wish to minimise the borrowing costs as much as possible, a secured loan can be an inexpensive and better option overall.
To help you consider your options, we recommend our guide to choosing the best small business loan.
Common uses and sectors
Secured loans are most commonly applied to industries where corporations possess valuable physical assets. Secured loans are particularly appropriate for financing large capital outlays or for smoothing cash flows over long horizons.
Secured business loans can also be used where unsecured providers have declined or the company has gone through a restructure and therefore is potentially in a more distressed position, but with good plans to grow and move forward.
These loans are typically secured on property owned by the business or the business owner.
Engineering and manufacturing
Manufacturers most often rely on machinery, equipment, or factory property as collateral when securing financing for expansions, upgrades, or purchasing raw materials on a bulk order.
Construction and property development
Secured lending is popular with developers and builders. The loans are secured on commercial land or property to finance new developments, refits, or bridging finance between developments.
Wholesale and retail
Retail and wholesale companies can pledge stock or inventory to provide security. It is useful when seasonal businesses need working capital during their slow periods before the busy season.
Transport and logistics
Logistics businesses are likely to raise finance against delivery van fleets, HGVs, or specialist vehicle finance to grow the fleet, enhance, or upgrade infrastructure.
Agriculture and farming
Agricultural businesses and farmers can pledge land, tractors, or animals as collateral in order to fund new machinery, barns, or irrigation systems.
Hospitality and tourism
Hotels, restaurants, and pubs can pledge property or equipment as security for a loan for the extension of premises or for their refurbishment.
Benefits of secured business loans
There are a number of compelling reasons why companies use secured lending:
Greater loan sizes
Since the loan is secured by an asset, the lenders are inclined to offer higher sums. The secured loans are therefore applicable to larger use cases like the acquisition of property and other large capital investments.
Lower interest rates
Because the lender has an element of security against default, the loan is less expensive. This can add up to a significant sum over the long term.
Longer repayment periods
Secured loans are provided for long durations, sometimes over 10 years or more. This allows you to comfortably space out monthly repayments as well as match debt to your cash flow cycle.
Easier approval with imperfect credit
Despite a potentially unhealthy personal or business credit score, lenders can still finance you if you have the right collateral. This provides opportunities to businesses that would otherwise be unable to access finance.
Saves equity and money
By offering assets instead of equity to raise capital, you don’t dilute the ownership. This allows you to keep complete control of your business while still raising capital.
Risks associated with secured business loans
While secured loans have numerous benefits, they also pose very real threats.
Risk of losing assets
If your company can’t maintain repayments, the lender has the ability to confiscate and sell the security asset. This can be hugely damaging to operations – especially if it’s a vital asset like a warehouse or a fleet of vehicles.
Longer application process
Valuing, estimating, and lawfully securing the asset is a more time-consuming and involved process than an unsecured loan. It would generally bring in extra legal costs and valuation costs from a third party.
Limitations on asset usage
From the moment you pledge the asset as collateral, you can’t dispose of it, sell it, or even refinance it until the end of the loan term without the lender’s consent.
You should carefully consider the risks before going ahead. You might also like to look at our how to qualify for a business loan application guide for tips on how to present your case.
Steps to apply for a secured business loan
The process to apply for a secured loan in the UK typically entails the following:
1. Choosing the right asset
Choose the asset you wish to offer as collateral. Make sure that you own or have a right to use it as collateral.
2. Determining the value
Value the asset. Either the lender’s valuer is appointed or a recent valuation by an expert can be used.
3. Prepare financial records
You may need to provide yearly accounts, bank statements, cash flow forecasts, and a business plan.
4. Go to a suitable lender
There are lenders who deal with specific assets (for example, commercial property or vehicles), so choose a lender that is suitable to your needs.
If you’re unsure of which loan might be best for you, then you can use our free instant quote feature to find which secured business loan might be best for you.
5. Undergo due diligence
The lender will examine your credit record, value of assets, business performance, and legal documents.
6. Sign the agreement
Once agreed, you’ll sign the loan agreement and security document (e.g. the legal charge on property).
7. Get paid
After the security is registered and documents completed, the money is disbursed, usually as a lump sum.
From choosing the right lender to the assistance in preparing the documents and the asset valuation, Rise Funding can assist you with all steps of the process.
Conclusion
A secured loan might be the perfect solution if your company has worthy assets, and you require access to finance at a competitive price for a significant investment. The lower interest cost and longer term offering make it particularly suitable for expanding companies with strong assets. The caveat is knowing the extent of the risk you are taking on. If your company relies heavily on the asset you are financing, weigh the risks cautiously and ensure that you have a solid repayment plan.
To discuss your options, go to our business loans page or call one of our funding experts for individualised advice. Contact us through the form below, or get an instant business quote by completing our online questionnaire.
