What are Secured Business Loans?

Secured business loans are a form of business financing that sees the company or owner pledge property or other assets as security in order to reassure the lender and therefore (in theory) reduce the cost of borrowing.

Like any other business loan, a secured loan provides the borrower with a significant lump sum of cash to invest in equipment or to use as working capital to fund business operations. This money will usually have to be paid back with interest according to a strict pre-agreed schedule.

Business loans are provided by banks or alternative lenders, who make their money from the interest charged. Because not every business will be able to pay back its loan, some of that interest has to cover the cost of those failed loans where – in the case of a business going bust – a lender could lose the entire face value of the loan. However, if the loan is secured by property, plant or another tangible asset, the lender can recoup some or all of those loses by calling in its right to take that asset if the borrower fails to meet the re-payment schedule.

Effectively, by offering something of value as security (such as a property) that the lender can seize if the business falls into arrears, much of the risk involved in the loan shifts to the business or, in many cases, the owner.

Pros and Cons of Secured Business Loans

By lowering the risk to the lender with its security offering, a business may benefit from a lower rate of interest on the loan. The bank or alternative lender still needs to cover the costs of its operations and will want to turn a profit, so interest rates and other charges can still be quite hefty.

Opting for the lower interest of a secured business loan becomes a far less clear cut choice when the business itself has no tangible assets of enough value to cover the loan, and the business owner offers their own property – often the family home – as security. The business benefits of a lower interest rate will then have to be offset against a huge increase in risk to the owner and their family: a subjective and difficult decision not to be taken lightly.

The other main benefit of a secured loan is that lenders will sometimes consider applicants with a less than perfect credit rating – or perhaps a new business with no credit history at all, as the unencumbered property provided as security mitigates the risk for the lender. In this case, an unsecured loan may not be on the table, but the owner still has other options for funding the business.

Alternatives to Secured Business Loans

In recent decades business loans, secured or otherwise, have tended to be the default option for businesses who were simply unaware of the many other possibilities now available. A business needing a large injection of cash – to build a new factory, for example – could opt for equity funding such as private equity, although this does mean that the owner dilutes his or her shareholding.

Even better, the business may find that it had the money all along – tied up in its accounts receivable. If a business can get hold of all the money it is owed today instead of waiting 30 to 90 days for it, it will often be able to secure a considerable lump sum which can be used to finance growing operations and even capital investment, without the need for property security.

This is the way that OptiPay funds business growth. Our flexible invoice discounting and other modern cash flow finance solutions, such as trade finance, help businesses to access their own money which is tied up in unpaid invoices. This requires no further security other than the debtors ledger. It’s a real alternative to a secured business loan.