A secured business loan is a type of loan that utilises the business’s assets, typically property, as security against non payment. This can allow companies, who would otherwise be unsuitable, funds to invest in the running and expansion of their business.
What Are Secured Business Loans
Banks and other lenders are particularly careful to whom they lend money to these days and as such it can be difficult for businesses to borrow money. Secured business loans are one option that can circumnavigate this problem as the borrower secures the loan by putting up its assets as security.
In effect, this means the lender is all but guaranteed to receive the repayments because the assets put up as security automatically become theirs if the loan repayments are not received.
Because property is usually the most valuable asset to a business it is most often used as collateral but other assets, such as equipment or stock, can also be utilised.
Each loan type has its own advantages and disadvantages and secured loans are no different in this regard. Whether or not this particular form of funding is suitable for your business will depend on a number of factors but we believe the main advantages are:
- Lower Charges And Interest Rates
- Higher Maximum Limits
Various loans may not be available to specific businesses because of poor credit ratings or a lack of established income. As the risk is enormously minimised for the lender, by the nature of the secure loan, it allows the lender to act with a certain degree of confidence. Secured business loans have therefore offered a method of financing to many companies who would otherwise may have been unable to access funding.
Lower Charges And Interest Rates
Interest rates are generally set according to the risk to the lender. Because secured loans are less risky for the lender, the interest rate is usually set at a lower level than those of unsecured loans. This can also be reflected in the fees associated with loans, such as security fees.
With your assets at stake it is important that your loan is flexible enough to take into account as many unforeseen circumstances as possible. This is why secured business loans are typically one of the most flexible in terms of repayments. It is important to make sure that you understand all the terms and agreements before committing to them, however.
Higher Maximum Limits
Depending on the assets you put up as security, the amount of funds made available through secured loans is usually much higher than those of unsecured loans, which can be typically limited to £25,000. This can allow for greater investment and more ambitious planning.
While it may be one of the easiest methods of obtaining a loan if you have assets to put up for security, these loans do come with some sizeable disadvantages and it is important to fully understand exactly what these are. We believe the main issues you should be aware of include:
- Higher Risk
- Extended Implementation
- Certain Contracts Are Inflexible
We believe the main problem of secured business loans is the risk involved. Should you find yourself unable to keep up with the payments, the relevant collateral will be lost and as this is most often property, this could mean losing your home.
Peace of mind and confidence in your business is important, not only for your personal well-being but in the day to day running of the company and such a loan can become something restrictive entity. It should be noted, however, that it is usually far more profitable for the loan provider to gain repayment of the loan than to seize and sell your assets.
With potentially so much at stake, it can take quite a long time for funds to be released. A secured loan in any form can be a much more complex contract than most other types, so it may not be suitable if you require immediate funds for investment. Even if this is not the case, because of the risks involved it may be wise to take some time to weigh up your options before committing anyway.
Certain Contracts Are Inflexible
This is where understanding the exact nature of the loan you are taking out becomes vital. Some lenders will insist on repayments without offering any degree of flexibility. If you think that there is a possibility that you will be unable to pay on the set date you should avoid signing the contract.
There are a few types of secured loan providers to choose from. Most renowned are the high street banks, but they are not always the best option and properly researching the terms, conditions, fees and interest rates can prove beneficial.
Types of Secure Loan Providers can Include:
- Governent Funding
- Peer To Peer
- Financial Companies
There are essentially three types of secured business loans available: Short term fixed rates, fixed term rates and variable rates. Fixed terms rates are those do not change over the course of the loan while variable rates can fluctuate. Although variable rates can decrease, saving you money, they can increase significantly and if you haven’t budgeted for that it can be hugely problematic.
All types of providers offer the various types of loans, but the interest rates and conditions will vary between each. Banks typically offer a slightly lower interest rate, between an estimated 4.4% and 4.7%, depending on various circumstances.
Maximum fund limits vary across the board, anywhere between a few thousand to hundreds of thousands, as do the length of the loans. In essence no one type of provider can be easily pigeon holed. Researching the subject thoroughly, including the various provider types, is highly recommended.
Who Can Benefit From A Secured Loan?
As previously mentioned, those who might not be suitable for other loans may find a secure loan the best option, but with low interest rates and fees, it can suit almost all shapes and sizes of businesses, as long as you have assets to put up as collateral.
If you are in a position where your business assets, or even personal, are of high value and you require a large investment, then the secure loan is probably the best option available. As long as you understand the risks and have planned your finances accordingly, it can be of great benefit to your business.
For some companies there are no alternatives in regards to loan options, but if you require large investment and have a business that is deemed suitable by the lender, there can be many other, and less risky options, available.
Revenue loans and invoice factoring can provide large amounts of funds if you business has a high turnover and are essentially methods of selling future profits to allow for greater cash flow. What’s more they supply finance quickly and securely.
Medium to long term loans may also be suitable as they can provide high levels of funds and incur low repayment rates due to the costs being spread out over time.