When you’re looking to raise money for your business, an early decision is the choice between secured and unsecured loans. Many secured loans use property as collateral, which throws up a few issues business owners should be aware of.
But first, let's start with the positives.
When you're looking to finance a major commercial project, a secured loan is often a great choice. By offering your bank, or other finance provider, significant collateral in the form of property (by which we mean land or buildings), you make it easier for them to offer you a serious amount of capital. When your project budget runs into many tens of thousands or more, having property you can offer as security makes it easier to get a positive decision.
It's not a guarantee. Every lender has their own approach to assessing credit risk, so having property won't necessarily be enough to get a positive response. But it helps.
Another big plus of having property as collateral is access to a more favourable interest rate. Security reduces risk on a debt. Risk, ultimately, is measured in pounds, so less risk means the finance arrangement will cost you less pounds.
In short, here are all the advantages you could gain from using your property asset as security:
A commercial mortgage is one form of loan secured against property. The mortgage term might range from just a few years up to 25. The amount you can borrow, or loan-to-value ratio, may be as much as 100% of the property value.
That was the good news. Now it's time to examine the issues you could run into when you're considering, or you sign up to, a loan that uses property as security.
When you're looking for working capital in a hurry, this isn't the finance for you. If you're trying to fix a sudden hole in your cashflow, or you want the budget to move fast on an opportunity, you're probably better off pursuing a short-term unsecured finance facility.
A loan that involves valuing commercial property, or indeed any other asset, is going to take longer to set up. You can probably get approval for small amounts of short-term finance in just a couple of days. For a loan secured against property, you're looking at perhaps a couple of months. There's a process to be followed and whichever way you approach it, this process requires time.
This may not be a problem for you. If you're planning ahead and have a longer-term project in mind, and you're prepared to wait in order to reap the benefits, you can factor this delay into your timescales. After all, what's a couple of months when you're working to a business plan that spans years?
If you can't keep up your repayments on the mortgage, or any other form of loan secured on your business property, you risk having it taken from you. Part of the deal is that if your business can't keep up with its obligations as a debtor, the lender has rights over ownership of the collateral.
This situation becomes even more challenging if the loan is secured on your personal property, such as your family home. You run the risk of it being repossessed if the business fails, or simply can't find the cash to make the repayments. Lenders typically start taking action after you've missed between three and six months of payments.
In a usual year around three out of 100 commercial mortgages in the UK run into trouble. Which means that around 97 out of 100 are being repaid by the businesses that took them out.
Maintaining repayments on a business loan comes down to good cashflow planning and budgeting, along with a solid strategy for putting that extra capital to work. Borrowing for business is about investing in activities that generate enough cash for you to make repayments, cover the interest and still have profit left over.
Both you and your business have credit scores. These are the ratings used by lenders as part of their process for approving applications for finance. The precise details of how credit scores are calculated isn't revealed by the rating agencies, but it's known that any failure to keep up with agreed repayments is damaging.
Any defaults will remain on your credit record for six years, making it harder to access finance at competitive rates during that time.
There are many different forms of finance available to businesses and a secured loan isn't always the most appropriate choice. We recommend that you take independent professional advice before entering into any finance arrangement.
Issues to consider when deciding what form of loan to take include:
You may be able to take out a business loan without using an asset as security by signing a personal guarantee. This commits you to personally settling the debt if the business is unable to do so.
It may be that you don't have property that you're able to use as collateral. However, you or your business may have other assets that would be considered as alternatives.
Every day our team of finance specialists handles enquiries from businesses looking to raise finance. Some are looking for short-term working capital; others want to invest in big growth projects. Some have a poor credit history, while others have a strong track record of excellent financial planning and budgeting.
We work with over 250 finance providers who, between them, offer funding solutions for businesses in a huge variety of different situations.
Whatever your borrowing needs, and whatever your situation, we'll help you find a way forward.
Let us help you raise the finance you need to fund your business plans. Get in touch with us today.