Borrow more and access competitive interest rates by offering an asset as collateral for your business loan.
If you’re looking to borrow money to help grow your business, there’s an extensive array of business loans available. However, if you own an asset you can use to secure your business loan such as residential or commercial property, you can access larger loan amounts and lower interest rates than on an unsecured loan.
Is a secured business loan the solution to your business funding needs? Let’s take a closer look.
How does a secured business loan work?
A secured business loan is a loan that is secured by an asset you own. This asset is commonly a residential or commercial property and is used to cover the loan amount if you can’t pay it back. So if you’re unable make your loan repayments on time, the lender may sell your asset and use the proceeds to cover your remaining debt and any other expenses it has incurred.
Why should you consider a secured business loan, especially when it means putting a valuable asset at risk? Since the loan is backed by your asset, the lender is assuming less risk when allowing you to borrow money. As a result, secured business loans come with more favourable terms than unsecured loans, allowing you to access larger loan amounts and also lower interest rates.
So if you run an established business, own one or more valuable assets and you want to borrow a large amount of money, a secured business loan could be the perfect choice.
Check out our guide to secured vs unsecured business loans for more information on the pros and cons of each type of finance.
What do you need as security?
When you offer an asset as collateral for a business loan, the loan is secured by the residual value of that asset. While this can help you access funding with more favourable terms, it also means that you may forfeit the asset to the lender if you can’t make on-time loan repayments.
The assets most commonly used to secure a business loan are:
- Commercial property
- Residential property
You don’t necessarily need to own the property outright in order to offer it as security, as business equity loans allow you to access the equity you have in your personal or business property to get the funding you need.
Depending on the lender and the amount you wish to borrow, you can also use the following assets to secure a business loan:
- Fine art
- Business equipment
- Appliances and valuable musical instruments
What are the risks of secured business loans?
The major risk with a secured business loan is that if you default on the repayments, the asset you offer as security could be repossessed by the lender. This could have serious consequences for the future of your business or, if you listed personal property as collateral, could potentially hit even closer to home.
As with any other type of loan, you should always be wary of borrowing more than you can afford to repay. Make sure you’re aware how much the regular repayment amount is, as well as what the total cost of the loan will be once it is fully paid off, before you access any financing.
How can you compare secured business loans?
Consider the following features when weighing up your loan options:
- Interest rates. This is a key feature when calculating the total cost of a loan. There are fixed- and variable-rate secured business loans available, and it’s worth shopping around to find a competitive rate.
- Loan fees. Check the fine print for details of any up-front and ongoing loan fees, as well as any fees that apply to late or missed payments.
- Minimum loan amount. Loan amounts vary depending on the lender, your financial situation and the asset you offer to secure the loan. However, check that any minimum loan limit that applies is suitable for your needs.
- Asset type. While many lenders will allow you to use either a residential or a commercial property as security for your loan, some will require you to use one or the other.
- Repayment schedule. How much will the regular repayment amount be and can the repayment schedule be tailored to suit your business cash flow?
- Repayment flexibility. Can you make additional repayments at any time if your business comes into some additional funds? Is there any penalty for paying the loan off early?
What businesses are eligible for these types of loans?
The exact criteria you’ll need to satisfy to qualify for a secured business loan will vary between lenders and depending on the amount you wish to borrow. However, you’ll typically need to meet the following requirements:
- Business history. Most lenders will require you to have been in business for a specified minimum period, such as six months or two years.
- Business financial strength. Lenders will assess the average monthly turnover of your business as well as profit and loss statements and income projections to determine your repayment capacity.
- Asset requirement. You’ll need to own a suitable asset (or assets) to provide sufficient security for the amount you wish to borrow.
Eligibility criteria vary greatly depending on the loan you apply for, so make sure you’re aware of all the necessary requirements before you apply.
Frequently asked questions about secured business loans
Who offers secured business loans?
Secured business loans are most commonly offered by banks and traditional lenders, but some short-term secured loans are also available from alternative lenders.
What if I want to sell the asset that I used to secure my loan during the loan term?
You will need to get your lender’s approval to sell the asset and offer another acceptable form of collateral to take its place.
What if I don’t have any assets I can offer as security?
You may need to consider your unsecured business finance options.