Secured Business Loans For UK SMEs

In addition to the factors above, there is also a difference in the borrowing experience. Since an asset is required to secure the loan, a more thorough assessment is necessary for secured lending. This process takes time, meaning approval can take weeks rather than hours.

Higher arrangement fees and legal fees will also apply, and loan-to-value ratios become relevant. Unsecured loans rely more on credit scores and recent financial performance.

There is also less flexibility with secured loans. Repayments are highly structured, insurance might be required, and there can even be restrictions on how you use the secured asset to uphold its value. For example, a commercial mortgage would not only need insurance but may also limit specific development initiatives. In contrast, an unsecured loan is often mixed into the business’s current account and used for day-to-day cash flow.

A common misunderstanding is around risk. While the secured asset is under threat of repossession should the business fail to repay, most unsecured business loans typically require a personal guarantee, which is a threat to the borrower’s personal assets.

Given this, secured assets aren’t only less risky for the lender, they can often have less risk for the borrower, where repossession risk is contained and controlled. However, some secured loan lenders may also ask for a personal guarantee.

Typical interest rates for secured vs unsecured loans

Interest rates vary depending on the asset, the risk profile of the borrower, the loan-to-value ratio, and the Bank of England base rate.

Typically, secured loans are cheaper due to the reduced risk for the lender. A commercial property loan with a 40% deposit might be around 6% APR, which is the SONIA rate plus 1%-2% at the time of writing. However, securing assets that depreciate quickly, like a new car, with a minimal deposit, might be closer to 10% APR.

Unsecured loans are usually much more expensive. With a good credit score and reliable cash flow, 10% APR may be achievable, but this can quickly double for credit cards or loans for less creditworthy applicants.

Is my business eligible for a secured business loan?

Secured business loans will always require a business to be UK-registered and typically demand at least six months of trading history, or one year’s worth of filed accounts.

Despite the higher borrowing amounts and longer terms, your business may be in a better position for secured loan approval compared to an unsecured loan.

Eligibility ultimately depends on the asset in question and the business’s stability. Minimum creditworthiness is required, but a fantastic credit score compared to a good one will not benefit you as much as with an unsecured loan.

Asset requirements vary. Many property-backed loans will require the property to be worth over £50,000 and to have a strong survey report. For asset financing, a £5,000 piece of machinery may not suffice as minimum values may start at around £25,000 and have a clear market for resale.

Like with an unsecured loan, pre-approval can be fast. An agreement in principle can often be granted immediately, but it’s not legally binding.

How much can I borrow on a secured business loan?

The lender may require a deposit of 20-40% (or existing equity) relative to the loan amount. This is to give the lender a margin of error, should repossession and sale of the asset be required. If they use an auction to get a quick sale, the asset is very unlikely to get full value. Additionally, it factors in depreciation.

This means a vehicle financing agreement for a £1 million fleet may require a £200,000 deposit. Because VAT-registered businesses can reclaim the VAT on new vehicles, lenders are aware that 20% is recoverable and may therefore request it as an upfront deposit.

Ultimately, the amount the business can borrow is limited by the value of the securable asset. Although it depends heavily on the type of asset, companies can expect to borrow around 60%-80% of the asset’s value.

How to find the right secured business loan for you

1. Figure out how much you need to borrow. What’s it for?
2. Assess what assets you have to secure against. Match your asset type to the appropriate lenders (a broker can help).
3. Plan your repayments. How long do you want to repay the loan for? Interest-only, or do they accept overpayments?

What assets can you use for a secured business loan?

In the UK, property and land are highly dependable in their value and depreciation is rare in the long run. Loan-to-value ratios for property and land can therefore be high. These are the most common ways to secure a loan for either property or general use, such as business expansion.

Machinery is a common asset for secured loans in the construction and manufacturing industries. Assets must typically be less than 10 years old and have established resale markets. So, the more niche and bespoke the machine, the harder it might be to secure against.

Vehicles, such as courier vans and HGVs, are common forms of collateral. Depreciation exists, but it is priced into using tried and tested formulas. Lenders prefer new vehicles as they have manufacturer warranties and are less likely to be affected by the previous owner’s treatment of the vehicle.

Trading assets are a popular form of security among retailers, who hold large stockpiles of these assets. They often have lower loan-to-value ratios, though, due to being harder to sell and potentially being perishable or becoming out of favour.

Intangible assets, such as patents, may be used to secure a commercial loan. They’re common in the tech industry but require more time and effort to assess during the application process. Specialist lenders would be required.

Invoices are a great way to access secured loans when the business has no assets. If the company has a large amount of receivables in accounts and needs cash immediately, these unpaid invoices can be secured against and are easily validated for lenders.

How long does it take to get a secured business loan?

Secured loan applications can take anywhere from a few weeks to a few months, depending on the type of asset and the lender.

Like unsecured loans, the alternative online lending market is often the fastest route to financing. For example, a specialist online invoice finance lender may release funds within 1-2 days of the application, whereas more traditional lenders, who use property assets as collateral, would take weeks.

For vehicle financing, the process is routine, and valuing new cars is relatively straightforward. Approval may be granted on the same day as the application.

When using property as security, a traditional bank would normally be used, and they can take several weeks to process and approve applications. Specialist lenders offering bridging loans for property purchases can operate on much faster timescales.

What are the advantages and disadvantages of secured business loans?