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Business banking: Secured business loans: when - and when not to - get them
Secured business loans are probably the most widespread kind of business loans available. Because they are backed by company assets, banks and financial institutions can leverage the risk related to this type of business finance - and in case businesses fail to honour repayments, their assets might just be transferred to the bank. So even though secured business loans might seem easier to get than other kinds of loans, business owners should really consider their decision to resort to them. Understanding how these loans work leads to a better understanding of their pros and cons.
Understanding secured business loans
Secured business loans are business loans backed by company assets which can be pledged if the business fails to honour repayments.
What are secured business loans?
With secured business loans, businesses can borrow funds from banks against the value of pledged assets, which can be used as collateral. In the world of private banking, mortgages which many individuals subscribe to finance their acquisition of a home are an example of this kind of loans. Such loans can be packaged in various banking products, covering all kinds of business finance needs. The lender can gain ownership of these securities if the business fails to honour repayments.
How do they work?
When negotiating the loan, businesses list all the corporate assets, such as buildings, material goods like machinery or equipment owned, business inventory, cash deposits. Lenders calculate the value of the loan, apply a discount rate, and determine how much the business can borrow, and at which APR. Usually, business loans cover needs worth millions of pounds and repayments spread over many years. If the business fails to honour repayments, they lose the assets to the lender. Quite often, a director’s guarantee is required, which puts the personal property of the director at risk in case company assets are not enough to pay back the loan. So it’s really important for businesses to be clear about the risk, and the value of these assets.
Advantages and disadvantages
Secured business loans have their advantages and disadvantages - although small businesses and large corporations will not necessarily have the same opinion about these pros and cons.
Advantages of secured business loans
Advantages of these loans include:
- the fact that they can be used to borrow very large amounts of money;
- they are more easily accepted by lenders than unsecured business loans;
- they also carry lower interest rates;
- they allow consolidation of debt or refinancing of existing business debt.
This is why these loans can be advised to start-ups which profits are deemed insufficient to be allowed to subscribe unsecured business loans.
Disadvantages include the facts that:
- assets are put at risk in case repayment cannot be made, which can put the very existence of the business at risk;
- terms are generally not very flexible, especially regarding repayments;
- early repayments usually carry penalties;
- these loans take a very, very long time to set up.