A secured business loan requires the provision of an asset to secure financing.
This means that the loan you’re given is backed up by some sort of provision. This provision is something that you, as the borrower, provides, such as personal assets of a certain value like your house or your car. Secured forms of lending are the method most commonly deployed by banks.
The idea being that if you fail to keep up with the loan repayments, the asset you have offered up to secure the loan may be taken as compensation by the lender.
You’ll also hear secured lending described as ‘asset-based banking’ which may help illustrate the point better, namely that the bank requires the offer of a potential asset in case the lendee cannot make the repayments on the loan they have taken out.
Examples of a secured loan
An example of secured lending in a business context is when an owner of a small-to-medium company may need to raise more money for their business.
An obvious option might be to secure a loan against your house, which is put up to the bank as security on the loan.
This is a show of goodwill to the lender (most often the bank) so they feel secure in providing the loan by knowing that if you fail to fulfill your loan-related obligations, the bank will not lose money as they can take your asset as compensation.
Examples of situations where a secured loan may be needed include when a company director might need to raise money to purchase machinery for their business.
The differences between a secured and unsecured loan
If you’re having trouble remembering the differences between these two different forms of loans, just remember that the clues are in their names. Compared to secured loans, unsecured loans are quite different.
Unsecured loans are loans in which the lender does not require any assets from the borrower to ‘secure’ the loan.
In short, they are a loan provided from the lender without any sort of asset offered up by the borrower for security.
The advantages of a secured business loan
Secured loans have many advantages, and that’s why they’re so popular as a loan option for business owners. Here are the reasons in detail:
You can get larger loans
The key benefit of going for a secured loan option is that you can borrow more money.
Because you are offering up high-worth assets as part of the loan-based deal between yourself and the bank (such as a house) you can be eligible to borrow significant amounts of money that can make a big change in your business.
For example, depending on the amount of equity available in your home, you can borrow over £100,000.
You have a longer time to pay it back
Whilst other loans usually have a 3-5 year period of loan-time to pay it off, secured loans have a longer lifespan.
This can come in handy if you’re borrowing a substantial amount of money, as it’s logical that the more time you have available to pay the loan off on a substantial amount, the more likely you are to pay the amount back and this will stop your asset from being seized.
Repayments are lower
What’s great about secured loans, is that they offer lower repayment rates for borrowers.
This is because the secured loan can be paid back over a longer time period, which keeps the repayments low, meaning the borrower can easily budget for this payment plan rather than having to give away a huge chunk of capital in one go.
This is a great advantage for businesses that are just starting out, and who need to maintain a steady cash flow.
It doesn’t matter if you’ve got a bad credit history
This is the biggest advantage of secured loans.
Lenders of secured loans actually prefer lendees with an imperfect credit history, as they offer a tangible asset to the lender as leverage in case they fail to make a loan repayment.
The disadvantages of a secured loan
However, there are some obvious disadvantages of secured loans, here they are.
Your property can be forfeit
This is the biggest disadvantage, you could lose your home.
It’s a pretty big risk to take to fund your business, and SME owners must keep this risk in mind when applying for a secured loan.
There are initial costs
Think of applying for a secured loan as a similar process to applying for a mortgage, and similarly to a mortgage situation, it can involve upfront costs, which can include the payment of administration fees before you’ve even got started.
It can be a slow process
Getting hold of a secured loan is a lengthier process than other formats because such high-value assets are involved in securing them.
If you’re using your house as collateral for example, property valuations and other legal undertakings are involved, – all of which takes time, and costs money.
Eligibility criteria for getting a secured business loan in the UK
If you own a tangible asset that holds a relatively high value (such as a house) then essentially you are eligible to opt for a secured loan.
As long as you feel sure that your business, for example, can generate enough capital to handle the regular repayments for the loan in question, then you shouldn’t worry too much about whether you can manage the repayments.
However, do make sure you have a regular and dependable income to honour the terms of the loan, or else, you may risk your asset being seized for good.
Poor credit scores don’t matter, and repayments are lower with secured loans as they can be taken out and paid back over a longer time period.
Your business needs to generate steady, but not necessarily huge amounts of capital, in order to meet the repayment requirements for secured loans.
UK providers of secured business loans
There are a variety of secured loans providers in the UK, here are three examples of lenders that offer reasonable to sizeable loan amounts.
What to watch out for (the fine print)
If you find that your business has made a little extra capital, and you want to repay your loan earlier than expected, you can’t.
The catch with secured loans is that they are not flexible. You can’t pay off the debt in one go.
There are early repayment penalties, meaning that you may have to pay fines if you try and pay off the loan early.
So think about this before you obtain a secured loan in the first place. The whole point of them is that you make the loan repayments in smaller, low-interest amounts over a longer time period than unsecured loans.
Case study: T King Associates
Founding story: T King Associates is a clothing supplies company that was founded in 1990 in Buckingham, UK.
Starting life from a small garden shed, and now operating from a large unit on an industrial estate, the family company is run by Trevor King and his son and Managing Director, John King.
They provide products such as printed workwear for other companies, including providing corporate umbrellas and associated gifts for other businesses.
“We were looking to lease good value products that could help us grow our growing business even more, so opting for a secured loan was a no-brainer.” – T King Associates
Trevor and his son knew they had to remain competitive in the bespoke work clothing market.
Their business had grown to the extent where demand was outstripping their capacity to supply their clients with the products they wanted.
The team was facing orders of over 1,000 units, however, their current machinery was becoming old and inefficient and couldn’t facilitate the growing demand, or produce the clothing fast enough.
The father and son team found themselves at a crossroads, where they needed a loan to finance the upgrading of their equipment, or else risk losing the loyalty of their customers.
Gaining a secured loan would enable them to complete bigger production orders, meaning their business could grow to meet this rising demand.
The Kings chose to opt for £20,000 via a secured business loan to purchase a production machine to fast-track the clothing production process.
This meant they could ensure they would remain competitive in an increasingly demanding clothing supplies market by being able to complete larger orders.
A secured business loan was the right choice for T King Associates because this form of loan allowed them to draw funds against an asset such as machinery.
This makes secured loans a preferred choice for businesses involved in the production and manufacturing sectors.
As we established earlier, this form of loan is arranged for a fixed period, and often covers the expected life-span of the asset used to secure the loan.
In T King Associates case, through the secured loan system they were able to directly purchase the equipment they needed to upscale their business and could repay it over an agreed time, which allowed them to plan ahead for their repayment obligations.
They received a £20,000 secured business loan from Macquarie, a global asset management company.
They are a good choice for production and manufacturing companies, as they can provide finance for work-related tools such as computers right up to forklifts and industrial machinery.
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