What Is a Secured Business Loan?

A secured business loan is a loan where you put up an asset as collateral. If you fail to repay, the lender has the legal right to sell that asset to recover what is owed. In exchange for that security, lenders typically offer lower interest rates, higher loan amounts, and longer repayment terms than they would on an unsecured basis.

It is a straightforward trade-off. You reduce the lender's risk, and the lender rewards you with better terms.

What can be used as security?

The most common form of security for a business loan is property, either commercial or residential. If you own business premises, a warehouse, or your own home, these can all be offered as collateral. The lender places a legal charge over the asset, which gives them a claim over it until the loan is repaid.

Other assets can also be used, depending on the lender and the type of lending:

• Commercial vehicles and plant equipment

• Business stock or inventory

• Other high-value assets your business owns

The loan amount you can access is generally tied to a percentage of the asset's value, known as the loan-to-value (LTV) ratio. Most secured business lenders work to a maximum LTV of 70% to 75% for commercial property, and up to 80% for residential property in some cases.

How much can you borrow and over what period?

Secured business loans cover a wide range, from around £25,000 at the lower end to several million pounds for larger transactions. Some lenders go higher, particularly for commercial mortgage lending backed by substantial property.

Repayment terms are similarly flexible. Short-term secured lending can run for as little as one year. Commercial mortgages and longer-term secured facilities can run to 25 years. The right term depends on what the loan is for. Funding a property acquisition makes sense over a longer period. Funding a short-term capital need makes sense over a shorter one.

Monthly repayments are calculated on a capital and interest basis in most cases, though interest-only periods are sometimes available, particularly on property-backed lending.

What does a secured business loan cost?

Rates on secured business loans in the UK currently sit at approximately 6% to 10% APR for most borrowers, based on the Bank of England base rate of 3.75% plus a lender margin that varies with LTV, asset type, and your business profile. Stronger borrowers with lower LTVs and clean credit will sit toward the lower end of that range.

Beyond the interest rate, there are typically arrangement fees to factor in, usually 1% to 2% of the loan amount. Valuation fees apply when property is used as security, since the lender will commission an independent valuation. Legal fees also apply on both sides, covering the registration of the charge over the asset.

The total cost of a secured loan is therefore higher than the interest rate alone suggests. On a £200,000 loan, arrangement, valuation, and legal fees might add £4,000 to £8,000 to the upfront cost. Factor this in when comparing the all-in cost against unsecured alternatives.

Who can get a secured business loan?

Most UK business structures are eligible: sole traders, partnerships, limited companies, and LLPs. The key requirements are that you have an asset of sufficient value to offer as security, and that your business has a credible case for repaying the debt.

Lenders will assess your business's trading history, accounts, revenue, and the purpose of the loan, as well as commissioning a valuation of the asset. A personal guarantee from directors is often required in addition to the security, particularly for limited companies.

Because the lender holds a charge over an asset, secured lending is often more accessible than unsecured borrowing for businesses with a difficult credit history. The asset reduces the lender's exposure, which means they can accept more risk in other respects.

When a secured business loan makes sense

The case for secured borrowing is strongest when:

• You need a large amount. Unsecured business loans typically cap out at £500,000 and in practice sit much lower for smaller businesses. Secured lending can go significantly higher.

• You need a long repayment term. Spreading a large capital investment over ten or fifteen years keeps monthly repayments manageable in a way that a three-year unsecured loan would not.

• You want the lowest possible rate. If you have property to offer and time to go through the process, a secured loan will almost always be cheaper than the unsecured equivalent.

• You are buying a business property. Commercial mortgages are a specific form of secured lending and are effectively the only practical way to finance a commercial property purchase.

The risks you need to understand

The most significant risk is straightforward. If your business cannot repay, the lender can force the sale of the asset used as security. If that asset is your business premises, the consequences for your operations can be severe. If it is your home, the consequences are personal.

This is not a reason to avoid secured lending, but it is a reason to take the decision seriously. You should be confident that the repayments are sustainable across the full term of the loan, including under a scenario where revenue falls.

A few other points worth understanding. The process is slower than unsecured borrowing. Valuations take time, legal charges take time to register, and underwriting is more thorough. Expect weeks rather than days from application to drawdown. Exiting a secured loan early often involves early repayment charges, which can be significant on longer-term facilities. And if your asset falls in value, you may face complications if you need to refinance or sell before the loan is repaid.