Secured Business Loans: A Full Guide

Written by

Aris Vourvoulias

Last updated

14 March 2024

What Are Secured Business Loans?

The term business loans is comprised of a vast span of information. Although simple in appearance, business loans actually consist of dozens of different types, one of which is described below.

Secured business loan is one type of small business funding. Sometimes referred to as collateral loans, they are simply a type of commercial loan with one key difference. They are secured with a kind of upfront, personal guarantee, or an asset. These in turn are used to ensure that the borrower will not fail to meet their obligation to repay the business loan.

In other words, as a business owner you are making a pledge to the lender. In case you fail to pay back your business credit, the lender will have the right to use the collateralised assets to compensate their losses. Collateral used in secured business loan reduces the risks for the lender, thus most probably lowering the interest rates.

What Is Collateral?

It is worth getting to know the term “collateral” as it is strongly affiliated with secured business loans.

Secured business loans are, as previously mentioned, characterised by being accessible through providing an asset or a personal guarantee that one will repay the loan with. Generally, types of collateral in collateral loans are predetermined based on the loan type and the amount you would like to borrow.

Investopedia put all you need to know about collateral in an interesting video you might find here.

Unsecured business loans, on the other hand, are loans that do not require any collateral as security for the loan.

Assets You Can Use for a Secured Business Loan

In this type of small business funding, you can secure your business loan with either a personal guarantee or collateral. Guaranteeing to repay your secured business loan with your personal assets is not that different from using collateral.

The difference between these two commercial loans is that with a personal guarantee, you bind yourself to being personally responsible for repaying the loan. Using your personal credit is particularly useful when you are just starting your business.

Types of assets:

• Investment Accounts 
• Marketing securities 
• Natural reserves 
• Real Estates 
• Personal assets e.g. land and residential properties 
• Machinery and factory equipment 
• Stocks and bonds

All in all, choosing collateral means that as a business owner you will stake one or a few selected assets such as a house or a car, hence, the value of collateral must meet or exceed the amount remaining on a collateral loan. In case of putting up a personal guarantee, the creditor will have the right to seize any and all financial assets that you have.

Secured Business Loans Providers

As with the majority of business loans, providers do not differ in terms of secured business loans. These are available through banks, governments or online business providers. What distinguishes them however, are the ways and requirements one must meet when applying for a secured business loan.

As we have pointed out previously, the preconditions vary greatly and so do the terms of getting a secured business loan. Very often the easiness with which it is possible to get a loan will, for instance, mean higher repayment rates. What you should refrain from is feeling scared when it comes to looking for alternative sources of funding.

Online business loans providers, peer-to-peer or crowdfunding websites are becoming more and more popular and, at the same time, they are legitimised sources of funding. They provide a good alternative when it comes to getting business loans with bad credit.

What If You Have Bad Business Credit?

Bad business credit sends a warning to a potential lender. It means that something has gone wrong. For example, you could have made a wrong decision or mismanaged your business finances. In both cases, it indicates greater risk, which does not work in your favour. Particularly after the financial crisis of 2008, banks became more careful towards granting business loans with bad credit. Lucky for many business owners, they are not the only secured loans providers.

In any case, it is worth having a good overview of what it means to have bad credit and how can you work with one. Assessing bad credit rating in the UK is more difficult than in some other countries. One of the institutions regulating the financial sector is the Financial Conduct Authority, which is responsible for dealing with children’s ISAs to pensions, direct debts to credit cards, loans to investments etc. More importantly, credit scoring is closely regulated by the FCA.

What differentiates the UK from the USA is that credit scorings in the latter are usually known in advance. In the UK lenders are not obligated to reveal their credit scores ahead, nor are they compelled to reveal the minimum credit score required for the applicant to be accepted.

Given the above factors, a small business owner in the UK will not know if their credit score qualifies them for a secured business loan. It does not mean that one should not bother to check their credit viability, on the contrary, applying for business loans means always being prepared, knowing what steps to take, and what to expect.

Secured business loans are there to help small business owners who, although they might have bad business credit, may still have a chance of getting business loan with low repayment rates. And remember, almost every small business loan is usually secured in some way. It is thus possible to get a business loan with bad credit.

Advantages & Disadvantages

Advantages of Secured Business Loans

• One of the greatest advantages of secured business loans is the possibility of getting lower interest rates as the risk the lender bears is much smaller in comparison to other loans.
• Secured business loans also mean a longer repayment period, or even the chance to build credit and develop a relationship between business and loan provider.
• Moreover, secured business loans are easier to qualify for. Given the hassle and difficulties one faces when applying for any business loan, this can ultimately be considered a great advantage. Especially because of the fact that even borrowers with a bad business credit can qualify.

Disadvantages of Secured Business Loans

• Securing business loan means putting something at stake. No matter how optimistic you may feel about the success of your venture, there is always a risk something might not go as planned. This is where the disadvantage comes into the picture as you pledged something as collateral – something the lender has every right to take away from you. That is why applying for a secured business loan, and choosing what to put up as collateral should be preceded by a thorough planning and research.
• Secures business loans take a long time to set up.
• Lastly, financial institutions consider the fair market value of an asset and not what the business paid for it. It would be advised to assess the value of the asset by hiring an independent appraiser and, thus, having an alternative opinion on that matter. This is particularly important if the views on the value differ substantially.

Find the Best Secured Business Loan for Your Business

Finding the best secured business loan might not be the easiest thing to do. However, by taking cautious steps in your research and decision making, you will be able to find something that suits your needs the most.

What you should keep in mind is that secured business loans are most likely to be granted, and have lower interest rates. However, the whole process of getting the loan might be substantially longer in comparison to other loans. Take your time to get familiar with all the terms, requirements and options. Then make the decision.

All content in this website is for informational purposes only and it does not constitute financial advice and/or recommendations and it should not be relied upon as such.