What Is Secured Business Loans

By Olivia Johnson - Trusted UK Business Expert

Last Updated 8th of December 2024

5 minute read

Running a business often means you need access to extra funds for growth or to cover unexpected costs. A secured business loan could be the solution, offering lower interest rates and higher borrowing amounts. We can guide you through how these loans work and whether they are right for your business.

A secured business loan is a type of loan that requires the borrower to pledge an asset, such as property or equipment, as collateral. If the loan is not repaid, the lender can seize the asset to recover the debt. These loans typically offer lower interest rates and higher borrowing limits.

Interested in learning more about secured business loans? Keep reading to understand how they work, what assets can be used as collateral, and how they might help your business grow.

What Is Secured Business Loans?

A secured business loan is a loan where the borrower offers something of value, known as collateral, to the lender in exchange for the loan. This could be a business asset such as property, equipment, or even inventory. The purpose of offering collateral is to reduce the lender’s risk. In return, the business typically receives more favourable loan terms, such as lower interest rates and higher loan amounts, compared to unsecured loans.

In simple terms, a secured business loan means the lender has a legal claim to the asset provided as collateral. If the business cannot repay the loan, the lender can take ownership of the asset to recover the money owed. This type of loan is often used for larger investments or when a business wants to access a significant amount of capital.

Secured business loans are commonly used by businesses that need to make big purchases, such as buying new machinery, vehicles, or even real estate. Because the loan is backed by an asset, lenders are usually more willing to offer better terms, making these loans more affordable for businesses.

How Do Secured Business Loans Work?

Secured business loans operate on a simple principle: the borrower provides collateral to reduce the lender’s risk. Here’s how it works step by step:

• Applying for the Loan: To apply for a secured business loan, a business first needs to identify which assets it can use as collateral. Common assets include commercial property, vehicles, equipment, or even accounts receivable. The lender will assess the value of the asset to ensure it covers the loan amount.
• Loan Approval: Once the asset is approved as collateral, the lender will evaluate the business’s creditworthiness, financial health, and the loan amount requested. If everything checks out, the loan is approved, and the funds are disbursed to the business.
• Loan Repayment: The business must make regular repayments according to the terms of the loan agreement. This typically includes the loan principal plus interest. Since the loan is secured, interest rates are usually lower compared to unsecured loans.
• Failure to Repay: If the business is unable to repay the loan, the lender has the legal right to seize the asset provided as collateral. This allows the lender to recover the money by selling the asset. While this is a last resort, it’s important for businesses to consider this risk before taking out a secured loan.

Types of Secured Business Loans

There are various types of secured business loans available, each suited to different business needs:

• Equipment Loans: These loans are specifically used to buy equipment for the business. The equipment itself is often used as collateral.
• Property Loans: If a business needs to purchase property or land, a secured loan can be taken out using the property as collateral.
• Invoice Financing: This type of loan allows a business to borrow money against outstanding invoices. The invoices serve as collateral until the client pays.
• Inventory Financing: Businesses with large amounts of stock can use their inventory as collateral for a loan. This is particularly useful for retail businesses.

Each type of loan comes with its own set of terms and conditions, but the principle remains the same: an asset is used to secure the loan.

What Are the Advantages and Disadvantages of Secured Business Loans?

Just like any other financial product, secured business loans come with their own set of advantages and disadvantages. Here’s what you need to know:

Advantages

• Lower Interest Rates: Because the loan is secured with collateral, lenders face less risk, which often leads to lower interest rates. This can save your business money over time.
• Higher Borrowing Amounts: Secured loans typically allow businesses to borrow more money than unsecured loans, making them ideal for larger investments or expansions.
• Longer Repayment Terms: With a secured loan, businesses often have the option of longer repayment periods, which can make managing cash flow easier.
• Improves Credit Score: Successfully repaying a secured loan can improve your business’s credit score, making it easier to qualify for other loans in the future.

Disadvantages

• Risk of Losing Assets: If your business cannot repay the loan, the lender can seize the asset used as collateral. This could lead to the loss of essential business equipment or property.
• Asset Valuation: Lenders will only offer a loan based on the value of the asset, which means you may not be able to borrow as much as you need if your assets are not highly valued.
• Complex Application Process: Secured loans often involve more paperwork and a longer approval process since the lender needs to assess the value of the collateral.

What Assets Can Be Used for Secured Business Loans?

Different types of assets can be used to secure a business loan, but they generally fall into a few main categories:

• Property: Commercial property, such as offices or warehouses, is commonly used as collateral. This is ideal for businesses that own real estate or plan to buy new property.
• Equipment: Machinery, vehicles, and other equipment can be used to secure a loan, especially if the loan is used to purchase new equipment.
• Inventory: For businesses that hold large amounts of stock, inventory can be used to secure financing.
• Accounts Receivable: Businesses with outstanding invoices can use these as collateral for a loan. This type of financing is known as invoice factoring or invoice discounting.

Before offering collateral, it’s important to check with the lender what types of assets they accept and how much they are willing to lend based on the asset’s value.

FAQ

Can any business apply for a secured loan?

Most businesses can apply for a secured loan, but eligibility depends on factors such as the business’s financial health, credit score, and the value of the collateral.

What happens if I can’t repay a secured business loan?

If you cannot repay the loan, the lender can take ownership of the collateral and sell it to recover the debt. This is why it’s important to only borrow what your business can realistically repay.

Are secured loans better than unsecured loans?

Secured loans offer better terms, such as lower interest rates and higher loan amounts, but they come with the risk of losing assets if the loan is not repaid. Unsecured loans may be easier to obtain but usually have higher interest rates.

How much can I borrow with a secured business loan?

The amount you can borrow will depend on the value of the asset you offer as collateral. Lenders will typically loan a percentage of the asset’s market value.

Can I use personal assets to secure a business loan?

In some cases, business owners may use personal assets, such as their home, to secure a business loan. However, this increases personal financial risk, so it should be carefully considered.

Secured business loans can be a great option for businesses looking to borrow large sums at favourable rates. By understanding how these loans work and carefully considering the risks involved, you can make the best decision for your business’s financial future.