Secured business loans

Secured business loans


min read

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Secured business loans can be a great option for businesses with valuable assets looking to secure funding at lower interest rates.  While secured loans offer benefits like higher loan amounts, they do come with the risk of losing your assets if you can’t make the repayments. 

If the idea of putting your property or equipment on the line feels too risky, you could also consider unsecured business loans, which offers more flexibility in return for slightly higher interest rates.

What is a secured business loan?

A secured business loan is a type of loan where the borrower pledges assets as collateral. This means that if the company fails to repay the loan, the lender can seize and sell the assets to recoup their losses. 

This type of loan is often suited to companies with a healthy business credit score and assets to commit as interest rates are typically lower.

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 valuable as collateral. This could be commercial real estate, company vehicles, or other business assets. The lender will assess the value of these assets to determine the loan amount and terms.
  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 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.

How are business loans secured?

Various assets can serve as collateral, depending on the lender's requirements. Assets can be things like buildings, property, equipment, inventory, money, or what people owe you. The value and type of collateral will be assessed by the lender to determine the loan amount and terms.

  • Commercial real estate encompasses various types of properties, such as office buildings, warehouses, and retail establishments. The property may be either owned or heavily mortgaged.
  • Business owners can use their homes or other residential properties as collateral. However, this does entail a certain level of risk.
  • You can use your company's equipment as collateral. This can be machinery, tools. Any of the equipment that is essential for the operation of your business. Lenders will assess the condition and value of the equipment, as well as its potential resale value in case of default.
  • Vehicles, such as company cars or delivery trucks, can also be used as collateral. Lenders will consider factors such as the age, condition, and market value of the vehicles. Additionally, the lender may require proof of insurance and proper maintenance records to ensure the value of the collateral.
  • Inventory is another potential collateral for a business loan. This includes raw materials, finished products, or goods that are ready for sale. Lenders will evaluate the market value of the inventory and consider factors such as demand, shelf life, and potential obsolescence.
  • Accounts receivable can be used as collateral for businesses that have outstanding invoices from customers. This is known as invoice financing or accounts receivable financing. Lenders will assess the creditworthiness of the customers, the ageing of the invoices, and the likelihood of collection.
  • Cash savings or deposits can also serve as collateral for secured business loans.

It's important to note that the type and value of collateral required may vary depending on the lender and the specific loan program. Some lenders may have stricter requirements, while others may be more flexible. Business owners should carefully review the loan terms. They should consult with financial advisors to choose the appropriate collateral.

Example of a secured business loan

To better understand how a secured business loan works, let's consider an example. James is a small business owner looking to expand his bakery. He applies for a secured business loan from a bank, using the bakery property as collateral. James can offer this asset as security to secure a loan with a lower interest rate. This loan will also have a longer repayment period. With the loan, James can buy new equipment and hire new staff.

‍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.

Advantages of secured business loans

If you have the assets to hand, a secured business loan does provide some 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 can offer more competitive rates. This can reduce the cost of borrowing and make repayments more manageable, freeing up more of your 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: New businesses might find it difficult to qualify for secured loans. Without a solid financial track record or valuable assets, securing a loan can be challenging for startups and younger businesses.
  • 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.‍

Unsecured business loans are much faster to procure, such as iwoca’s Flexi-Loan, which includes decisions within 24 hours.

Are all business loans secured?

No, not all business loans are secured. Unlike secured loans, unsecured loans do not require collateral. Unsecured loans are typically riskier for lenders, resulting in higher interest rates, smaller loan amounts, and more stringent eligibility criteria. 

Although with unsecured business loans, it’s likely that lenders will ask you to sign a personal guarantee to secure the loan.

Does a secured loan hurt your credit?

Obtaining a secured loan does not inherently harm your credit. But other lenders will be able to see it and it may impact any future application for additional finance. Plus, failing to make timely repayments or defaulting on the loan can negatively impact your credit score. It is essential to borrow responsibly and manage your loan obligations diligently to maintain a positive credit history.

What are the differences between secured and unsecured loans?

Applying for a secured or unsecured business loan will depend on several factors such as your business history, asset value, and funding needs. A quick overview is:

  • Secured business loans: require collateral against the loan and often have lower interest rates since the funding provider takes on less risk.
  • Unsecured business loans: do not require collateral, meaning that the lender can’t sell your assets if something goes wrong - while often coming with a more speedy and simple application process.

Our Flexi-Loan is an unsecured business loan that is designed specifically for small businesses, with no early repayment fees and top-ups available if you need additional funds (subject to re-approval).

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

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

‍Are secured loans less expensive than unsecured loans? 

Secured loans are typically less expensive than unsecured loans due to the lowered risk for lenders. Secured loans are better for borrowers in the long run because they have lower interest rates and longer repayment periods.

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 their likelihood of recouping their investment.

Which banks provide secured business loans? 

Several banks and alternative lenders provide secured business loans, understanding the importance of such financial instruments for growing businesses.

‍Is a secured business loan 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 important to determine the long-term impact on your business if things go wrong. You may want to consider alternative funding options before making a decision, such as:


Words by
Charlotte Emms

Charlotte was a UK PR Manager at iwoca. She's been sharing news and insights about the finance industry for over four years.

Article published on
January 24, 2023
Last reviewed on:
July 17, 2024

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Secured business loans

Secured business loans are a type of funding that require businesses to use their assets as collateral - meaning that they can be sold by the lender if things go wrong. This article discusses what secured business loans are, how they work, and their pros and cons.