Should I consider a secured loan for my business?

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Cash flow is so important for UK businesses and many owners will often explore different funding options to stay on top of their finances and running costs.

Whilst government grants, private investment and personal savings can be a starting point for a new company, for businesses that are growing or facing a cash shortfall, the use of a business loan can provide an important injection of cash to pay for things like growth, staff wages, overheads, inventory and even tax bills.

A survey by SME Loans showed that 38% of small businesses in the UK struggle with cash flow on an ongoing basis and around 2.2 million people have not been paid on time in the last year because of the company’s cash position.

One of the most common business loan options is to use a secured loan, which essentially uses collateral or a valuable asset in the organisation in order to borrow money from a bank or loans provider. This type of security may be a commercial or residential property, machinery, inventory or vehicle – with the amount you can borrow relative to the value of this asset and there is a risk of repossession if you cannot keep up with repayments.

The rates offered on secured loans can be very reasonable, with some lenders offering products from 3% APR. This will depend on the quality of the asset being leveraged and other factors such as the age of the business, its turnover and credit history. In some cases, a secured loan can often be cheaper than an unsecured loan.

The average loan duration is around 1 to 5 years, with some lenders able to extend the loan offering until 25 or 30 years.

The amount you can borrow will depend on the duration of the loan, the company’s turnover and value of the asset. For instance, you will typically be able to borrow more if you are using a £1 million property as security, compared to a vehicle worth £20,000. Some lenders are able to offer up to 100% of the asset value.

David Beard, founder of Lending Expert commented: “Secured loans can play a vital role for some businesses looking to free up some cash and use their offices, land or property as security.”

“The market rates are very competitive and you may find success with a more niche, commercial business loan provider than one of your high street banks.”

“You will need to keep up with repayments because if you let these fall into arrears, you could see your property or items repossessed as the lender tries to recover their costs.”

“In particular, you may want to think carefully about securing a loan against your own residential home. Whilst some company founders and entrepreneurs have had success with this before, you want to avoid a position where you are giving up your home and you are left homeless.”

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