How does a secured business loan work?

When it comes to getting a loan for your business, there are so many options out there that may be suitable for funding its start or growth. 

A secured business loan is one of those options, often called a collateral loan; it offers the borrowers an opportunity to receive funds by pledging their valuable assets as security.  More specifically, these types of loans require the borrowers to utilise their valued assets as collateral for the approval of the loan amount.

What can business owners use as collateral to qualify for a secured loan? Usually, assets include residential or commercial properties, equipment or machinery and B2L properties. They can also include soft assets such as stock or debtors.

A secured business loan enables you to borrow up to £2 million across a term up to 15 years, however, the amount that you can borrow depends on the value of your assets.

Is a secured loan the best loan for your business?

Secured funding might be the right option for your business if:

• You are a UK homeowner or asset owner
• You are a director of a Ltd company 
• You are comfortable securing against your property or other assets you own
• An unsecured loan doesn’t fit your business needs

Usually, if your business needs larger funding options, secured loans will be your first option. Lenders tend to offer larger amounts if there are valuable assets backing up the loan. The more assets you use as collateral, the more funds you may be able to obtain.

When a business lacks valuable assets to use as collateral, secured funding can still be an option if you apply with a personal guarantee. In this case, a company director will provide a personal asset, such as a property, which will be utilised as collateral for the loan.

What are the benefits of a secured business loan?

It’s much easier to be approved for a secured business loan since using valuable assets as collateral reduces the risk for the lender.

Secured business loans include a lower interest rate, with a more flexible repayment period, giving business owners the opportunity to apply for larger funding amounts. Even if your credit score is low, you’ll still be able to receive funds since the lender is taking on less risk by using your assets as a backup. 

One thing to keep in mind is that this type of funding can take more time to be approved than an unsecured loan as valuations need to take place against the asset as well as additional legal checks.

These funds are available through banks, governments or independent finance brokers. The requirements business owners must meet when applying for a secured loan is different, depending on who the lender is. 

What information do you need to provide to apply for a secured business loan?

• Name of your business
• Details of the guarantors
• Authorisation for personal searches
• Amount of funds required
• The reason this amount is wanted
• Details of the assets (estimated value, address, etc)

About the Author: George Holmes is a Business Funding Specialist and Managing Director at Aurora Capital, a team of independent finance owners who help businesses thrive and achieve their long-term goals.