How Do Secured Business Loans Work?
Sam Griffin
A secured business loan works by giving the lender a legal claim over an asset you own. That claim, called a charge, protects the lender if you cannot repay. In exchange for accepting that risk, you get access to lower rates and larger amounts than unsecured borrowing typically offers. Here is how the process works from application to repayment.
How the lender secures the loan
When you take a secured business loan, the lender registers a legal charge over the asset used as security. For property, this is recorded at HM Land Registry. For business assets, a charge over company assets is registered at Companies House.
The charge does not transfer ownership of the asset to the lender. You continue to use, occupy, or operate it as normal. What the charge does is give the lender the right to force a sale of that asset if you default on the loan. Without repaying the loan, you cannot sell or remortgage the asset without the lender's consent, because the charge shows up in the title or at Companies House.
Once the loan is fully repaid, the lender releases the charge. That release is registered in the same way the charge was, and the asset is then free of the lender's claim.
First and second charges
If there is already a mortgage or other charge over a property, a new lender ranks as a second charge. This means the first charge holder gets paid first in any sale or default scenario. The second charge lender recovers whatever remains.
Because second charge lending carries more risk for the lender, it typically comes with higher rates and stricter criteria than first charge borrowing. It can still be useful when the equity in a property is sufficient and the first charge lender will not consent to additional secured borrowing.
A first charge position is available when you either own the asset outright, or can refinance the existing charge as part of the new arrangement.
The application and approval process
The application for a secured business loan involves more stages than an unsecured loan, because the lender needs to value the security as well as assess the business. The typical process runs as follows:
You apply, providing business accounts, bank statements, details of the loan purpose, and information about the asset you are offering as security.
The lender carries out an initial assessment of both the business and the asset. If they are comfortable in principle, they issue a decision in principle (DIP).
An independent valuation is commissioned on the asset. For property, a RICS-qualified surveyor carries this out. The lender commissions it but typically recoups the cost from you at completion.
The lender issues a formal offer once the valuation is complete and underwriting is finalised.
Solicitors on both sides handle the legal work, including drafting the charge documentation and registering it with the relevant authority.
Once legal formalities are complete, the loan is drawn down and funds are transferred to you.
The full process typically takes four to eight weeks, though it can move faster with experienced solicitors and a straightforward asset.
Drawdown and repayment
Most secured business loans are drawn down as a single lump sum at completion. Some larger facilities, particularly for development or staged projects, allow staged drawdowns as milestones are reached.
Repayments are typically made monthly on a capital and interest basis. Each payment covers some of the accrued interest and reduces the outstanding balance. Over the term of the loan, the balance decreases and a greater proportion of each payment goes to principal rather than interest.
Interest-only periods are available on some products, particularly commercial mortgages. The borrower repays only the interest each month and the capital at the end of the term. These reduce monthly outgoings but mean the full loan amount remains outstanding until the end, which requires a credible repayment strategy at that point.
What happens if you cannot repay
If you miss payments, the lender will typically first try to contact you to understand the situation and agree a path forward. Lenders are required to treat borrowers fairly and to work with businesses facing genuine short-term difficulties before taking enforcement action.
If the default is sustained and cannot be resolved, the lender can enforce the charge. For property, this typically means appointing a receiver or applying to court for an order for sale. The property is sold, the proceeds used to repay the outstanding loan balance plus costs, and any surplus returned to you.
For assets other than property, the process is similar. The lender sells the asset to recover the debt. Enforcement is a last resort, but it is real, and the consequences for a business whose premises are sold from under it can be severe. This is why the decision to pledge an asset as security should be made with a realistic view of the business's ability to service the debt across the full term.
Frequently asked questions
Do I still own the asset when I take a secured business loan?
Yes. The charge gives the lender a legal claim over the asset, but you retain ownership and can continue to use it as normal. Ownership only transfers if you default and the lender enforces the charge.
Can I sell the asset I used as security while the loan is outstanding?
Only with the lender's consent. The charge on the asset prevents you from transferring ownership without settling the loan or making alternative arrangements with the lender first.
What is a loan-to-value ratio and why does it matter?
The LTV is the loan amount expressed as a percentage of the asset's value. A £150,000 loan against a property valued at £250,000 is a 60% LTV. Most secured business lenders will go to 70-75% LTV on commercial property. Higher LTVs mean more risk for the lender and typically result in higher rates or stricter terms.
Can I make early repayments on a secured business loan?
Usually yes, but early repayment charges often apply on fixed-rate products, particularly in the early years of the term. Check the loan agreement before making a lump sum payment. Some lenders allow overpayments up to a certain percentage each year without charge.
What does a receiver do?
If a lender appoints a receiver in a default scenario, the receiver takes control of the asset to sell it and repay the debt. The receiver acts in the lender's interest, not the borrower's. Their priority is recovering the outstanding balance, not achieving the best possible price for you.
This article is for informational purposes only and does not constitute financial advice. Always seek independent advice before making financial decisions.
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