The pros and cons of secured business loans
When considering secured or unsecured finance for your business, there are several factors to consider. Each business is different and the way they collect payment also differs greatly.
There is no one size fits all product when it comes to business borrowing, and no ‘best’ product. Each business must consider which option best meets their needs.
We have broken down a number of the pros and cons of secured lending to make that process simple.
- Secured lending is usually cheaper, due to the reduced risk to the lender.
- Secured lenders will allow you to borrow the money over a longer term, reducing your monthly repayments.
- The addition of security usually allows you to borrow more money than would be available on an unsecured basis.
- Adverse credit can cause a major problem during unsecured business loan applications. Secured lenders tend to take a more relaxed view on previous issues, where there is a good reason for them.
- As the security will need to be valued and a legal charge placed on the property, there will be fees to pay upfront. The valuation and legal fees must be paid during the application process, meaning you will have to spend money before you receive your loan. In addition, if the valuation is unfavourable, then the loan may even be declined, meaning the valuation fee is wasted.
- When borrowing over a longer term, the total interest charged will usually be higher. You should consider the total cost of the loan before moving forward.
- To secure a loan against something, you need the asset in the first place. If you don’t have suitable assets, you should consider another type of business funding.
- Due to the additional checks, including the valuation and legal process, applications take longer to complete than unsecured borrowing. Applications can take several weeks, depending on the lender.
How to get started
Although each lender has their own methods of processing applications, there are common details that are needed by all lenders. We discuss your needs over the phone and will ask any relevant questions during the initial call. In general, we will ask you the following:-
- The security offered and the value of it (plus any outstanding loans already secured by it).
- The trading performance of your business (turnover and net profit especially).
- How much you’re looking to borrow and for how long.
- The reason for the loan.
- Details of your business and what it does.
- Details of the directors and major shareholders of the business.
- Information about the credit history of the business and its shareholders and directors.
Of course, depending on your individual circumstances, additional information may be required.
What is the application process?
Once your application has been assessed and a suitable lender chosen, you will be provided with a quote.
At this point, a formal application can be made, and supporting information must be sent to the lender to allow them to fully assess your application.
Once everything has been checked and approved, a valuation of the security will be required. Should everything go as expected here, a formal offer can then be issued.
Once you have checked and signed the offer, the loan will be legally executed, and a charge registered against your security. The funds will then be paid into your account to use as planned.
Do you work with start-up businesses?
Yes, we can offer secured business loans for start-ups if clear affordability can be demonstrated. The key to this is to ensure that a robust business plan and formal projections are in place.
This allows the lender to fully understand the proposed business and make a solid assessment of your application.
Although producing these documents can seem like hard work, it will significantly increase the likelihood of your loan being agreed.
Why do secured loans have more relaxed criteria than unsecured loans?
Unsecured lending is high risk for any funder, as in the event of default, they have very little chance of getting their money back.
Secured lending solves this problem by allowing the lender to take security over an asset. This allows them to take possession of, and ultimately sell it in the event of default. In this situation, the lender is passing the risk of loss onto the borrower, while reducing their own risk.
With a lower risk of financial loss, any lender is going to be more open to the idea of relaxing their criteria.
Will my assets be at risk?
Yes. As you are securing the loan against your assets, you may lose them if you fail to make the repayments as agreed with the lender.
Although this would most likely not happen immediately, failure to keep up repayments would ultimately result in repossession.
Why are secured loans cheaper than unsecured loans?
As the loan presents less risk to the lender, they are usually happy to lend at lower rates, as their risk of losing money is greatly reduced.
This also means that the better the security offered is, the lower your interest rate is likely to be.
What if I don’t have any property or assets?
If you’re looking for a business loan but don’t own any property or assets, you have two options.
Firstly, you may be able to secure your loan against a guarantor’s assets or property, if the owner of the asset is happy to help. Of course, their assets will then be at risk should you fail to keep up the repayments on the loan.
If this is not an option, you should look at other business finance options such as unsecured business loans, merchant cash advances or invoice finance.
Will I qualify?
With sufficient security and the ability to support the proposed repayments, you have a very good chance of being approved. When compared to unsecured lending, the criteria are much more relaxed.
How much can I borrow?
This type of lending is generally restricted by the amount of security you’re offering.
When securing borrowing against a property, your maximum loan is usually 70% of the value of the property. For other assets, this may vary.
On top of the loan to value restriction, lenders will want to ensure that the monthly repayments are affordable. Each lender has their own method of calculating this and will want to see your bank statements and accounts in order to come to a decision.
What if I have an existing mortgage over my property?
Where there is an existing first charge secured against a property, lending can usually be offered on a second charge basis.
This means that your new loan and your current mortgage would run alongside each other.
Where this is the case, the combined amount of both loans must fall within 70% of the property value.
I was turned down for a loan by my bank, can you help?
Yes, we usually can. High street banks tend to offer loans at low rates, but this does come at a price. Their criteria are usually very strict and on the back of the pandemic, it can be very difficult to get your application approved.
In addition to high street banks, we also work with a number of specialist lenders who take a more flexible approach. Where your bank has said no, one of our alternative lenders may be happy to say yes.
Will I be expected to provide a personal guarantee?
Yes, most lenders will require a personal guarantee, in addition to any security offered.
How to get started
To get a quote, enquire online or give us a call on 01922 620008. One of our business finance experts will talk through your situation and offer you written terms within two hours of your enquiry.