How does a secured business loan work?

When it comes to getting a loan for your business, there are so many options that can be suitable for financing start-up or growth.

A secured business loan is one of those options, often referred to as collateral loans; It offers the borrowers an opportunity to obtain funds by pledging their valuable assets as collateral. More specifically, these types of loans require borrowers to use their estimated assets as collateral for loan amount approval.

What can business owners use as collateral to qualify for a secured loan? Assets typically include residential or commercial real estate, equipment or machinery, and B2L real estate. They can also include soft assets such as stocks or debtors.

A secured business loan allows you to borrow up to £2 million over a period of up to 15 years. However, the amount you can borrow depends on the value of your assets.

Is a Secured Loan the Best Loan for Your Business?

Secured financing could be the right option for your business if:

  • You are a UK homeowner or property owner
  • You are the managing director of a GmbH
  • You can conveniently secure against your property or other assets you own
  • An unsecured loan does not suit your business needs

If your business needs larger financing options, secured loans are usually your first option. Lenders tend to offer larger amounts when valuable assets support the loan. The more assets you use as collateral, the more funds you can get.

When a business lacks valuable assets to back up, secured financing can still be an option if you apply with a personal guarantee. In this case, a business executive provides a personal asset, such as real estate, which is used as collateral for the loan.

What are the advantages of a secured business loan?

It is much easier to get approved for a secured business loan because using valuable assets as collateral reduces the risk for the lender.

Secured business loans carry a lower interest rate with a more flexible repayment period, giving business owners the ability to apply for larger amounts of financing. Even if your credit rating is low, you can still get funds because the lender takes less risk by using your assets as a backup.

Note that this type of financing may take longer to be approved than an unsecured loan due to the need to carry out valuations against the asset and additional legal checks.

These funds are available through banks, governments or independent financial brokers. The requirements entrepreneurs must meet when applying for a secured loan vary depending on who the lender is.

What information do you need to provide to apply for a secured business loan?

  • Your company name
  • Information about the guarantors
  • Permission to search for persons
  • Funds Needed
  • The reason why this amount is desired
  • Information about the assets (estimated value, address, etc.)

About the author: George Holmes is a Corporate Finance Specialist and Managing Director at Aurora Capitala team of independent financiers dedicated to helping businesses thrive and achieve their long-term goals.

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