Secured Business Loans

What is a secured business loan?

A secured business loan is borrowing backed by a charge over property or other assets, which the lender can take if repayments are not made. The charge is a legal document registered against the asset, at the Land Registry for property or at Companies House for a company's other assets. It gives the lender the right to sell the asset and recover what is owed if the business defaults.

Because the lender has that fallback, it is exposed to less risk than with unsecured business loans. That is why secured business loans in the UK generally come with lower interest rates, longer repayment terms and higher borrowing limits. The trade-off is that the business, or a director, is putting a specific asset on the line.

What can be used as security?

• Commercial property owned by the business, such as offices, workshops, warehouses or retail units. The most common security and the easiest for lenders to value.
• Residential property owned by directors, offered personally to support company borrowing. Often the only substantial asset a smaller business can offer, and the greatest personal risk.
• Plant and machinery, where the equipment has a resale market and is not already financed under hire purchase or lease.
• Vehicles, including commercial fleets, again provided they are owned outright.
• The debtor book, meaning the unpaid invoices owed to the business, usually through a debenture that covers all current and future receivables.

Lenders discount every asset class: property might support borrowing of up to 70 per cent of value, specialist machinery much less. Where several assets are combined into one facility, the product is usually called asset-based lending.

First and second charges

A first charge gives the lender priority over everyone else if the asset is sold. A second charge sits behind an existing first-charge lender, typically a commercial mortgage provider, and is only paid from whatever is left after the first lender has recovered its debt. Second-charge lending is therefore riskier for the lender and is priced higher, though it allows a business to raise money against a property without disturbing a well-priced existing mortgage.

The first-charge lender usually has to consent to a second charge, and some mortgage agreements prohibit it altogether.

Loan-to-value and how security shapes the offer

Loan-to-value, or LTV, is the loan amount expressed as a percentage of the asset's valuation. A £350,000 loan against a property valued at £500,000 is 70 per cent LTV. Lower LTV means more equity protecting the lender and tends to produce a lower rate; higher LTV pushes the rate up or leads to a decline.

Security also affects term. Property-backed loans can run for ten to twenty-five years. Loans on vehicles or machinery are limited to the asset's useful life, often three to seven years. The longer the term, the lower each monthly repayment, but the more interest accrues across the life of the loan.

Using a secured loan to consolidate or refinance

Secured borrowing is frequently used to replace a collection of unsecured debts, merchant cash advances, credit cards and short-term loans with one longer facility at a lower rate. The mechanics are described on our business debt consolidation page. A secured loan can also refinance an existing commercial mortgage or a single expensive facility, which is covered under business debt refinancing.

Two cautions apply. Converting unsecured debt into secured debt changes the consequence of default from a damaged credit record to a possible loss of the asset. And a longer term can increase the total repaid even when the rate is lower, so compare on total cost, not the monthly figure.

Eligibility

Providers look for a UK business with a trading record, accounts showing the loan is affordable from profits, and an asset with clear title and sufficient value. Directors' credit histories are still checked, and a personal guarantee is often requested alongside the security, particularly where the asset belongs to the company.

Where a sole trader or small partnership borrows £25,000 or less, the agreement is regulated consumer credit. Loans secured on a borrower's home may also fall within mortgage regulation. Limited companies and LLPs generally sit outside both regimes.

Documents usually needed

• Two years of filed accounts and recent management accounts
• Six months of business bank statements
• Title documents and existing mortgage statements for the property
• Asset registers and ownership evidence for plant or vehicles
• A statement of the purpose of the loan and, for consolidation, settlement figures

What does a secured business loan cost?

Beyond interest, expect a valuation fee paid upfront to a surveyor, legal fees for both sides, and an arrangement fee that is often a percentage of the loan. Early repayment charges are common on property-backed loans, especially fixed-rate ones. Any broker or introducer fee must be disclosed before you commit.

Benefits and drawbacks

Alternatives to consider

• An unsecured loan for smaller sums where speed matters more than rate.
• Invoice finance where the business has a strong debtor book but no property.
• Restructuring existing agreements rather than taking new secured borrowing.
• Guidance on personal guarantees before agreeing to one alongside security.
• Free, impartial advice from Business Debtline if the business is already struggling to pay.

Frequently asked questions