Secured business loans can be a great option for businesses with valuable assets looking to secure funding at lower interest rates. You can spread the cost of borrowing over a longer period and enjoy benefits like higher loan amounts. However, what are the risks of using assets as collateral, and how does this kind of loan work?

We discuss the ins and outs of secured business loans, including what’s involved and the advantages, drawbacks and key considerations when applying for one.

What is a secured business loan?

A secured business loan is a type of loan where the business borrowing the capital pledges assets as collateral. It generally involves lower costs and interest rates, due to reduced lender risk and the longer repayment terms offered. Unsecured loans don’t require assets as part of the loan agreement, but you may still need to provide a personal guarantee.

Secured business loans are well-suited to larger companies and those with a healthy business credit score and valuable assets to commit to the agreements, or businesses requiring larger amounts of capital, which secured loans offer compared to most unsecured loans.

How do secured business loans work?

Secured business loans require you to pledge assets as collateral to secure the loan. These assets could include property, equipment, inventory, or even accounts receivable. Here’s a closer look at how they function:

1. Pledging assets: To obtain a secured loan, you'll need to offer something of value as collateral, such as commercial real estate, company vehicles or other business assets.
2. Loan approval: Lenders are generally more willing to approve secured loans because the collateral reduces their risk. This means you might qualify for a larger loan amount and a lower interest rate compared to unsecured loans.
3. Using the loan: Once assets are valued and the loan is approved, you can use the funds to grow your business, whether that means buying new equipment, expanding operations, or covering other business expenses.
4. Repayment: You’ll make regular repayments over the loan term. If you fail to repay the loan, the lender can seize the collateral to recover their losses.
   

What are the differences between secured and unsecured loans?

The main difference between secured and unsecured loans is whether or not you need to commit assets as collateral. With a secured business loan, your business must provide assets as collateral, while when applying for an unsecured loan, you’re not required to put up any business assets to be eligible.

The option you choose can influence the loan amount you may be able to borrow and the costs involved. The assets used for secured loans lower lender risks, meaning they’re generally prepared to give you longer terms, higher capital borrowing and lower interest rates than with unsecured loans. 

Due to asset valuation, secured loan application processes can take longer, with unsecured loan applications and approvals usually being quicker and simpler.

Find out more about the difference between secured vs unsecured loans here.

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What assets can be used to secure a business loan?

Various assets can serve as collateral, depending on the lender's requirements. Lenders will assess an asset’s value to help determine amounts and terms offered.

Here are the main assets businesses can use as collateral to secure a business loan:

• Commercial real estate, such as office buildings, warehouses and retail establishments, or business owners’ residential properties.
• Business equipment, including heavy machinery and other high-value tools. 
• Vehicles, such as company cars, vans or delivery trucks – lenders consider age, condition, market value, etc., and may require proof of insurance and proper maintenance records.
• Inventory, including raw materials, finished products or goods ready for sale.
• Accounts receivable, including outstanding client invoices, which are typically used in invoice financing or accounts receivable financing.

For certain lenders, cash savings or deposits can also serve as collateral for secured business loan.

When to use secured business loans

There are many reasons to choose a business loan backed by assets. Here are some of the most common reasons and use cases for secured business loans:

• Asset-rich businesses that want access to larger sums of capital to expand operations.
• Organisations going through large-scale business changes, using existing assets as collateral to fund system upgrades and new equipment.
• Businesses looking to purchase big-ticket assets that require long repayment periods to cover the costs involved.
• Business owners who are seeking a more stable loan agreement to align with cash flow, with low interest rates.
• Companies that have been through difficult periods and need to steady the ship with a low-cost, long-term finance agreement.  

‍How to get a secured business loan

Funding providers have different requirements when you apply for a secured business loan. Most will review the following factors before making a decision:

• Collateral: This provides loan providers with a form of security and can be anything of value that your business owns, such as property, equipment, or other assets.
• Financial statements: Loan providers will want to ensure that your business can afford to make monthly repayments on the investment and are likely to ask for your financial statements.
• Business credit score: Lenders will take your business credit score into account when making a decision. Find out how you can improve your business credit score.
• Trading history: Secured business loans are typically available to businesses that have been in operation for at least two years.
• Personal credit history: You may also be asked to provide information about your personal credit history to support the application.
  

Secured loan providers – where to apply for a secured business loan

You can get secured business loans in the UK from the main high street banks, business banks like Allica, and various fintechs and alternative finance lenders, such as Funding Circle and Capify.

Although you can start applying for a secured business loan via most bank and lender websites, with most traditional banks, the application process can involve speaking directly with the bank and providing various documentation and paperwork. This takes time, and the process can take a matter of weeks. 

With more modern fintech providers and digital lenders, you can apply for loans fully online in minutes, and approvals can take as little as 24 hours, thanks to automated steps within the approval process. However, many offer more unsecured loan options, with secured loans taking a little longer due to asset valuation. 

Advantages of secured business loans

If you have the assets, a secured business loan provides various benefits, including:

• Easier to qualify for: Because you're offering collateral, lenders view these loans as less risky. This means they are more willing to extend credit, even if your business credit score isn't perfect or your business is relatively new.
• Lower interest rates: Since the loan is backed by collateral, lenders offer more competitive rates. This can reduce the cost of borrowing and make repayments more manageable, freeing up cash flow for other business needs.
• Higher loan amounts: The value of the collateral provides a safety net, allowing lenders to extend more substantial financing. This is particularly useful if your business needs a significant amount of capital for large projects or major investments.
  

Disadvantages of secured business loans

While secured business loans offer several advantages, there are also some potential drawbacks to consider:

• Risk to assets: If you’re unable to make repayments, the lender has the right to seize and sell the collateral to recoup their losses. This could mean losing essential business assets such as property, equipment, or inventory, which could severely impact your operations.
• Challenges for new businesses: Start-ups and new businesses can find it difficult to qualify for secured loans, as they may not have a solid financial track record or valuable assets available.
• Increased paperwork: You’ll need to provide detailed documentation to prove the eligibility and value of your assets. This can include appraisals, maintenance records, and proof of ownership, which can be time-consuming and may slow down the loan approval process.‍
  

Common questions about secured business loans

Below, we tackle some of the most common queries about secured business loans. Take a look.

Does providing a personal guarantee make a loan secured?

While providing a personal guarantee might seem like a way of securing a loan, a business loan requiring a personal guarantee doesn’t make it a secured loan. Like business assets being used as collateral, it does reduce the risk for the lender, as it’s a layer of protection, but it’s not technically a security in the same sense.

In the latter case, lenders can pursue the guarantor’s personal assets if the business fails to make loan repayments via legal channels.

Learn more in our article: What Do Personal Guarantees Mean for Business Borrowing.

How do secured loans differ from asset finance?

While secured loans involve using assets as collateral to secure the capital, many forms of these loans aren’t taken out to purchase assets. When referring to asset finance, this is a form of financing that enables companies to hire or acquire assets, such as property, machinery, vehicles and other business equipment. 

There are various types of asset finance, such as hire purchase, lease finance, contract hire and asset refinancing. These agreements enable businesses to lease/use the assets and spread the costs over numerous monthly instalments. In some forms, like hire purchase agreements, you can own the asset at the end after a final balloon payment. 

They can be deemed a form of secured finance, as often the assets being leased/hired are used as security for the credit offered.

Does a secured loan hurt your credit? 

Obtaining a secured loan does not inherently harm your credit, but lenders will check your credit file during applications, leaving a footprint, which can cause a temporary drop in score. The good news is that responsible debt management and timely repayments will boost your rating.

However, if you fail to make prompt repayments or default on the loan, it will negatively impact your credit score. It’s essential to borrow responsibly and manage your loan obligations diligently to maintain a positive credit history.

Are secured business loans easier to get than an unsecured business loan?

Secured business loans are generally easier to get than unsecured loans. Using collateral lowers the lender's risk, so they’re more willing to give credit to borrowers with less-than-perfect credit or limited business experience, if they have assets to use.

Are secured loans less expensive than unsecured loans? 

Secured loans are typically less expensive than unsecured loans due to the lowered lender risk and can appeal to borrowers because of the lower interest rates and longer repayment periods. However, you need to consider the total cost of borrowing. 

Do banks prefer secured business loans?

Banks often prefer secured business loans due to the reduced risk they carry. The collateral provides banks with a valuable asset they can seize in case of loan default, increasing the likelihood of recouping their investment.

Deciding whether a secured business loan is right for your business

The suitability of a secured business loan will depend entirely on your business. While they can come with lower interest rates and access to larger funds, you’ll be putting your assets on the line. Therefore, it’s essential to assess the potential long-term impact on your business if circumstances change.

It’s worth considering alternative funding options before making a decision, such as:

• Revenue-based finance
• Peer-to-peer lending
• Equity finance
• Unsecured flexible business loans

Iwoca is a leading provider of flexible business loans for UK SMEs. Our loans are unsecured, so they’re a good option if you don’t have many valuable assets to use as collateral. 

You can borrow up to £1 million over loan periods of a few days and weeks, right up to 60 months. We provide fast access to finance, thanks to our hassle-free online application and approval process – expect a funding decision within 24 hours.