What can I use as security for a business loan?
Find out what you can use as security for a secured business loan.
What is a secured loan?
A secured loan is secured against company assets such as vehicles, equipment or property. These assets are known as collateral.
Equity is the amount of money you can "release" from an asset and is determined by how much an asset is worth minus any outstanding finance secured on it.
The amount of equity available will determine how much you can borrow, along with credit worthiness and affordability checks.
The term "Secured Loan" is typically referred to as loan with security by way of property, either commercial or residential.
The term "Asset Refinance" is typically referred to as a loan with security by way of a tangible asset.
What types of assets can I use on a loan?
There are range of different types of assets that are eligible to be used as security. The main ones are:
- Commercial Property
- Residential Property
- Plant & Machinery
- Personal Pensions
- Art & Jewellery
How much you can borrow depends on which type of asset you use as security. The amount you can borrow is based upon loan to value (LTV) and this varies between assets.
LTV is the amount of finance you can release from the asset and is worked out on a percentage basis. Usually, lenders will finance up to 75% LTV on loans secured against property, or up to 100% on assets such as plant and machinery. This is all credit dependant and subject to full underwriting of course.
How much the lender is willing to finance will depend on a variety of factors such as outstanding finance, credit scores and affordability checks among other things.
How are assets valued?
To assess how much equity is available in an asset, lenders will carry out a current market valuation to gain an accurate value.
Many people assume that the asset is worth what they bought it for, however this is not always the case.
Usually, property and land increases in value over time, meaning it could be worth more than the original purchase amount.
Other assets such as equipment and machinery will usually decrease in value, due to age and usage. This is known as asset depreciation.
Formal valuations enable lenders to find out the current market value of what you are using as collateral. In some cases, a lender will use a third party to provide a valuation. In property cases they will use a surveyor and in asset cases they will use a specialist valuation company.
The valuation report produced by the surveyor or asset valuer is what the loan amount will be based on, not the original purchase price.
When is a secured loan the right option for me?
- If you have large amounts of equity available in your assets, secured lending can be a good option as the amount of equity will determine how much you can borrow.
- If you need longer terms, then secured loans in property are available up to 25 years.
- If you have a below average credit score, there is less focus on your score as you are offering collateral for the loan, but it is always important for the lender to understand the rationale for the loan for them to assess their credit decision accurately.
You do need to consider however:
- As there is more paperwork and valuations that must be carried out, secured finance can take longer than unsecured finance to complete.
- As this is a secured loan your assets can be at risk in the event of a default.
How does my credit affect secured business loans?
Whatever type of loan you apply for, all lenders will use your credit score as well as other financial status information to help them with the approval process.
Your credit score affects an application because it helps lenders to assess whether you are likely to stick to your agreement, pay on time and pay in full.
For business loans secured on assets, lenders still assess the company’s financial stability, credit scores and affordability criteria. There can be less emphasis on these types of things with a secured facility, but lenders can charge more interest for what they perceive as riskier credit covenants.
How to get a business loan without security?
There are a wide range of business loans you can get without security, known as unsecured business loans.
Unlike secured loans, unsecured loans are not secured against assets.
Without needing to put up collateral, these types of loans are best suited to borrowers who do not have access to eligible assets.
Instead of looking at the amount of equity in assets, lenders will use credit scores, business bank accounts and financial reports to calculate your eligibility and maximum borrowing amounts.
A lender may also require further supporting information to make a credit decision.
This can be things like copies of contracts you have won as you may need financial assistance to fulfil said contacts, as an example.
It is worth noting that unsecured loans are not available over the same terms at secured loans.
They are generally available over a maximum term of 5 years, depending on the purpose of the loan and how financially viable your business is.