The pros and cons of a secured business loan

You need funding to launch, manage and grow a business. You could use your personal savings, a gift from a family member or apply for a business loan to get your company off the ground. 

The pandemic brought about numerous financial challenges for companies worldwide, and many of them are now in need of additional funding. Business loans can be difficult to obtain, and the application process is often rigorous. A secured business loan is when a company offers an asset as security against its borrowing. The lender is more likely to provide a loan when they have more security. You will still make monthly repayments on the loan – but if you fail to keep up with your repayment plan, the lender can seize the asset. This asset could be a property, vehicle, piece of machinery or stock. 

The amount you can borrow with a secured business loan depends on the assets you offer. If you can offer a valuable asset to secure the loan, you will likely receive a larger amount. The directors of smaller companies will sometimes use their personal assets to secure a business loan. This is a risky game to play, especially if you are offering up a family home or asset of sentimental value.

Secured business loans tend to be larger than other funding sources. The exact amount you can receive depends on the profitability of your business and the assets offered. Most lenders prefer tangible assets that are much easier to value than assets like intellectual property rights.

Here are the advantages and disadvantages of a secured business loan in the UK. 

The Pros

Secured business loans typically offer lower interest rates compared to unsecured loans. You can often borrow more funding over a longer period. A larger time frame gives you a chance to get back on your feet, develop a recovery plan and start making repayments on the loan. Monthly repayments spanning over several years are far more sustainable and manageable than making a large on-off repayment. A lender is less likely to scrutinise your company credit score and turnover when a tangible asset is in place. However, they will still examine these factors to some degree when assessing your eligibility for a loan. 

When you are applying for a loan, you need to consider how you will repay the loan and whether it is realistic for your company. If you make a bad judgment call, you could lose the asset you offered up and end up in a worse position than when you started. 

 The Cons

Secured loans can take much longer to obtain than other sources of funding. A secured loan is also only available to you if you have an asset to offer as collateral. Younger businesses may not have a substantial asset to offer. An unsecured business loan, personal savings or a credit card may be more suitable for start-up companies.

A business loan is a big commitment, so make sure it is the right decision for your company.