Secured Business Loans

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How it Works

 

What is a Secured Business Loan?

Secured vs. Unsecured Loans

There is a vast range of funding products available to UK businesses, but when most people consider debt finance, the first loan type to spring to mind is often the unsecured business loan. Like a loan that may be taken out as part of your personal finance, an unsecured business loan is not guaranteed with any form of collateral, making the risks somewhat higher for the lender. This has a number of downsides including:

• Limited loan size
• A common requirement for a personal guarantee
• Higher interest rates

Mitigating risk is one of the most important factors in obtaining a suitable loan, and a key method for lowering that risk is to offer a guarantee on the loan, providing the lender with a backup option should repayments not be made.

This security or collateral is the foundation of the secured business loan.

Assets as Collateral

Secured business loans differ from their unsecured counterparts by being tied to a business asset that the lender can repossess and sell to recoup any losses if the loan repayments are not met.

There is a huge range of assets that businesses can leverage as collateral for a secured business loan including:

• Machinery
• Property and land
• Equipment
• Stock and inventory
• Vehicles
• Furniture and fittings
• Accounts receivable
• Intellectual property
• Other business-owned assets, such as art or gold

Loan-to-Value

An essential factor in asset-based secured business loans is that of loan-to-value or LTV. This is a percentage of the total asset value that the loan represents and is the upper limit of the amount of capital that can be obtained by leveraging the assets.

For example, if the lender is willing to offer a loan of 60% LTV against the business assets, and the asset’s are valued at £140,000 then the maximum available as a loan is £84,000.

The loan-to-value and asset value components of a secured business loan are the most significant metrics used in determining the level of capital that can be raised.

Secured Loan Interest and Repayments

The schedule for repayments with a secured loan is identical to that of an unsecured loan.

Interest rates do vary, but are lower than those found in comparable unsecured loans.

The asset used as collateral may affect the interest rate offered and many deals will be available, making it worth time researching to find the best secured loan deal on the market.

As asset-based secured business loans can be for larger sums, repayment schedules can be developed that are as lengthy as 15+ years. 

The Main Uses of a Secured Business Loan

Secured business loans are typically a long-term loan structure that is best for company expansion.

While the capital can be utilised for any purpose, other debt funding alternatives may be preferable for short-term cash flow support use. It is important to obtain the right loan for the purpose to make sure the loan rates and structure best suit the business need.

Secured asset-based finance is primarily used for:

Expansion

Using a secured business loan to grow the business is often the main use for the capital raised. Expansion can cover a range of activities that include:

• Equipment purchase
• Investing in new employees
• Training
• Building stock and inventory
• Purchasing premises
• Marketing
• Project development
• Research

As a secured business loan provides substantial capital, it can give the business the boost it needs to invest in new opportunities. It is usual in these circumstances that the secured loan costs are easily offset against the income that will be gained through the expansion.

Refinancing

A consolidation business loan is one that is used to pay off existing loans, lines of credit and other business debt, bringing those multiple lines of debt into one single umbrella.

Clifton Private Finance can help if you are looking to a secured business loan for refinancing. Contact our specialist asset refinancing team today. 

Qualifying for a Secured Business Loan

When looking for a secured business loan, the largest consideration is that of suitable assets to offer as collateral.

It may be beneficial to contact specialist financial advisors to discuss your business assets to determine suitability - often you will discover additional assets in addition to those that are initially obvious.

You should also consider your business credit rating. While credit history is not as much a factor for secured loans as it is for unsecured business finance, it will have an effect on your loan terms.

Finally, it is important to ensure your business documentation is all up to date. Lenders will want to see:

• Business accounts
• Business plan
• Financial forecasts
• Business registration documentation
• Personal identification
• Asset valuation and proof of ownership 

The Risks of Asset-Based Finance

Unlike an unsecured loan or many other forms of business debt finance, asset-based secured loans are tied to business assets which means they are at risk if you do not meet your repayments.

As well as the financial impact, this also means that the business loses the asset and can no longer use it as part of its company process. If the asset was mission-critical, this can present significant further difficulties to the business and its future stability.

Total Debt - The total monies that the lender will seek to recover are equal to the outstanding debt, plus any costs associated with the administration and exercise of repossession. These fees may be substantial and can include:

• Legal fees
• Asset-valuation costs
• Administration costs
• Auction or sale fees
• Storage
• Recovery costs
• Interest and late-payment fees

Sale of the Asset - It is most likely that the asset will be sold at auction as rapidly as possible. This may mean that the full value of the asset is not obtained as may have been possible in a more lengthy sale process to a specialist market.

Recoup of the Debt - The lender will seek to recoup the debt as described above. Any additional proceeds from the sale of the asset remain those of the business and will be returned.

Use of the Asset with a Secured Loan

While the business does not lose the asset when it is used as collateral, there are some restrictions that are placed on the freedom of use and ownership.

These may include:

• Resale - The asset may not be sold without agreement with the lending company and any resale would typically result in the balance of the debt becoming immediately due.
• Insurance - The asset will need to be fully insured to mitigate the risk to the lender.
• Maintenance - The asset will need to be kept in good order while it linked to the loan and maintained as is appropriate.
• Alterations - A limitation may be placed on altering or customising the asset in any way.
• Limitations on use - Depending on the asset type, there may be limitations placed on its use. For example, vehicles may have mileage limits applied to control depreciation.
• Use as collateral on secondary loans - The asset cannot be used as collateral for additional loans in most circumstances, though some secondary finance options may exist in tandem with the primary secured loan. Specialist advice would be needed to secure a second loan on additional equity on the asset. 

Secured Business Loans with Bad Credit

One of the advantages of a secured business loan over an unsecured business loan is that the importance of prior credit history and business credit rating is lessened - these factors are still significant, but they do not limit the availability of a secured loan in the same way.

Businesses that are suffering from bad credit may still be able to obtain a secured loan. This can be especially useful when considering consolidation loans that are a powerful tool in lifting a company out of a period of poor debt and opening up opportunities for the future.

If you are looking for a bad credit loan and have the available assets required to secure asset-based finance then speak to the dedicated bad credit team at Clifton Private Finance today.

We will work together with you to find the best debt finance solution for your company. 

Secured Loans for Asset Purchase, Including Commercial Mortgages

One aspect of secured business loans is those that are guaranteed by assets that you do not currently own but intend to purchase with the capital. These types of loans fall under the categories of asset finance and commercial mortgages.

Asset Finance at a Glance

Asset finance is a broad term for loans and leasing agreements that are used to purchase assets for business use and includes secured business loans that are linked to assets bought with the financing - most commonly referred to as hire purchase.

Hire purchase, along with finance leasing and operational leasing form the backbone to asset finance, providing businesses with a range of flexible options for acquiring assets for company use.

Asset finance is commonly used to obtain:

• Vehicles
• Machinery
• Equipment
• Software
• Furniture and fittings

To discuss asset finance arrangement for business expansion, speak to an asset finance specialist at Clifton Private Finance.

Commercial Mortgages

Using a secured loan to purchase a property is commonly known as a mortgage, with business loans used for this purposes referred to as commercial mortgages.

A commercial mortgage is a long-term business loan that is tied to a building or land as collateral for the loan. Like all other forms of secured loan, the size of the loan is limited by the value of the asset as well as the business’s ability to make repayments.

If you are looking for a commercial mortgage, then Clifton Private Finance are perfectly positioned to help.

With a dedicated team of specialist commercial mortgage advisors as well as established relationships with the vast range of UK business mortgage providers, Clifton PF are here to get you the best mortgage deal possible. Speak to one of our team today.

Deposits for Mortgages, Hire Purchase, and Other Asset Finance

As with all secured business loans, loan-to-value plays an important part in calculating commercial mortgage and hire purchase loan sizes. However, where a secured loan leveraged on existing company assets is merely limited by the asset value and LTV terms, when purchasing an asset directly with a secured loan, a deposit is required to meet the difference in loan value and asset cost.

Funding a deposit can be done through other business financing, though another aspect of secured loan viability (including that for mortgages) is that of debt service.

This is the current level of debt liability to the business and if it is too high then the secured loan application will be unsuccessful. Thus, adding stress to debt service through additional finance to cover the cost of deposit is rarely recommended - in short, asset-based finance used to purchase assets does require the business to have existing liquid capital for use as a deposit. 

7 Alternatives to a Secured Business Loan

With a wide range of funding products available on the market, a secured business loan is only one of several options available for businesses looking to raise capital. Alternatives to asset-based secured business loans include:

Unsecured loans

If the required capital is not too high and the business credit history is comfortable, then an unsecured loan may provide easy to acquire funding.

Debt-service coverage ratio unsecured loans

Some specialist lenders will offer DSCR unsecured loans where evaluation on suitability is determined through assessment of current business debt service and turnover. These DSCR loans may provide an alternative to traditional unsecured and secured business loans for companies with poorer credit history but strong current and future finance projections.

Revenue-based financing

RBF offers unsecured flexible finance options that is based on projected figures and repaid as a percentage of turnover rather than a set monthly repayment fee. This form of financing is excellent for expansion plans in high-growth sectors, such as e-commerce and SaaS.

Cash flow finance 

If you are looking to a loan to cover a current period of difficulty then cash flow finance may be a more suitable alternative. This includes options such as invoice finance and merchant cash advance, as well as overdraft facilities, credit cards, and business bridging loans.

Asset Finance

Alternative asset finance options, such as finance lease or contract hire can provide the funding needed to obtain vehicles, IT equipment, specialist machinery and more.

Investment capital

Looking to external partners for equity financing can provide the funds needed for expansion without the need for direct repayment and any additional stress on cash flow. Venture capitalists and angel investors, as well as private investors, present a compelling alternative to secured business loans for business owners willing to offer shares in the company in exchange for both capital and experience.

Crowdfunding

If you are seeking capital to develop a new product, then crowdfunding may offer a suitable substitute to a secured loan. With a efficient market research that leads to a strong marketing campaign, crowdfunding projects can yield the capital needed to get your project off the ground. 

Applying for a Secured Business Loan with Clifton Private Finance

The UK has a strong marketplace of finance providers that offer secured business loan products for companies looking for both expansion and refinancing options, however, finding the right service to match your company’s specific need can be time consuming and difficult. Clifton Private Finance are the solution.

Our specialist teams are up-to-date with the current range of products and deals and will match your unique need to the right secured business loan with the lowest possible interest rate and most favourable terms for you.

Contact Clifton Private Finance today to discuss your requirements and let us present the options that are the best fit. With advice and support, you will soon have the capital you need to boost your business.

If you need business funding, call us on 0203 880 8890, or book an appointment.

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