Secured business loans primarily require the borrower to turn over to the lender an asset.
Eligible assets can range from invoice, shares of stock, plant and machinery, property, vehicle, fixtures, jewellery, among others. The acceptability of an asset will depend on the requirement of a lender who may decide based on which ones are easiest to liquidate. Regardless of what type of asset you offer, what matters as a borrower is that the real market value of your assets will suffice to justify your requested loan.
The pledged asset serves as collateral or a guarantee that covers for the lender’s losses which may be incurred from a borrower’s failure to repay.
However, the thought of having a precious asset seized is what some loan seekers fear most. As such, borrowers tend to associate this type of business financing option with higher risks when compared to unsecured business loans.
But just like unsecured ones, secured financing have its merits, as well as other drawbacks, which you should give thorough thought when getting a loan.
· Lower interest rates – Since lenders are more secured, they can draw up terms that are more considerate of the borrower’s repayment capacity and conditions. This flexibility is seen in the
very low interest rates secured business loans offer—much lower than that of unsecured business loans and other financing facilities. In the United Kingdom, interest rates per annum can range from 6 per cent to 20 per cent.
· Longer payment term – In the UK, secured business loans’ repayment period can reach up to 30 years. A longer repayment term bids more time for borrowers to fulfil his obligations.
· Higher loan amount – Secured business loans in the UK can offer over £1 million. Lenders can offer as much as 100% of your secured asset value. This is largely beneficial to those taking on big-ticket projects or expansion. This means the more assets you have in your balance sheet, the more you can borrow. However, some business lenders also decide on the amount to shell out based on the purposes and uses of your loan.
· No standard credit record – It is easier to obtain loans from this type of financing if your business has a limited track record or you have a patchy credit score history. However, some lenders may require that you still demonstrate how you intend to pay back with evidence deriving from your annual turnover. Some loan companies also require the disclosure of the number of years your business has been in operation to give a hint of how established you are.
From this, we can sum up that among the factors that make secured business loans a boon to borrowers, especially those with patchy credit scores, is access to huge funds at a lower interest rate and with a longer repayment period.
· Potential loss of the pledged asset if repayments are not made – Such scenario will have a more detrimental impact if you bet your assets all-in in exchange for the loan. It’s equally detrimental if the asset seized is a facility or equipment which is crucial for your business operations as it only thins any chances of recovery, your business being a revenue driver to your overall finances. Besides losing assets, the failure to repay loans will badly affect your credit history and further lower your chance to bounce back. It is worthy to note, however, that there are some banks willing to work with bankrupt companies that have viable corporate rehabilitation plans.
· Some lenders require the pledge of a personal guarantee as an additional assurance – A personal guarantee puts a company director, or a top executive authorized to handle the business responsible to repay the total amount unpaid by the business. To achieve this, the guarantor puts his own assets on the line by signing an agreement yielding to the lender’s possession of his assets should the business he operates defaults. The requirement of a guarantor makes for a bigger deterrent for many borrowers, especially those already concerned with the fate of their asset secured against a loan, to tap secured business loans.
· The application process can take longer – Unlike unsecured business loans which may take only a few hours—some even claim minutes— for a decision on your application and just a few days for the transfer of funds if you are approved, some secured business loan financiers conduct face-to-face interviews, an investigation in your operations site, valuation of your assets, and other activities to verify the information you provide them related to your financials.
· Longer payment term – Although we mentioned that a longer payment term is an advantage, it can also be a disadvantage. When the repayment term is stretched out over a lengthy time period, this usually comes with a low interest rate which may sound initially convincing for
borrowers wanting to pay as low as he can on interest rates and fees. But a lower interest rate for a long time may just level with a high interest rate loan made for a short term, which is common to unsecured business loans.
Who offers secured business loans?
Although there are traditional banks that offer secured business loans, alternative financial lenders and even-government backed facilities are more used by entrepreneurs, especially small-sized ones.
Alternative financial lenders have become a favourable choice due to their flexibility in tailoring their products to fit a client’s need. And this practice extends across all loan types, not only for secured ones.
To determine the most suitable arrangement for business-borrowers, lenders look into a number factors such as the size and nature of your business which will give an idea of your risk profile; annual turnover; where the loan will be used; and business strategies that will be employed throughout the repayment term, among others.
Here is a tally of some lenders in the UK that offer secured business loans, the amount they can provide, their interest rates and available terms.
|Company name||Minimum amount||Maximum amount||Percentage of interest rate||Payment term|
|Fleximize||£5,000||£500,000||1.5% per month||1 to 48 months|
|Funding Circle||£10,000||£1 million||0.16% per month||6 months to 5 years|
|£26,000||£5 million (up to 70% of loan to value of your property)||Starts at 7.90%||1 to 30 years|
|Nucleus||£50,000||£50 million||Starts at 4% per yea||Not stated|
|ThinCats||£250,000||£15 million||Not stated||6 months to 5 years|
Aside from assuaging the risk lenders are exposed to, the requirement of a collateral signifies an expectation that borrowers, with the aid of the loan, should have improved its financial conditions or buoyed its operations toward a more sustained revenue growth that can cover for the loan, interest and other fees.
This requires careful business planning on the part of borrowers. When this plan is well ironed out, you can better identify what type of loan you will need.