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The big problem with business loans secured against property

March 5, 2024
Nick Adamou

When seeking funding for your business, a crucial decision lies in choosing between a secured and an unsecured loans. Many secured loans rely on property as collateral, presenting potential challenges that business owners should carefully consider.

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The Upside:

Secured loans, especially when backed by property as collateral, can be a sound choice for financing major commercial projects. Providing substantial collateral, such as land or buildings, reduces the lender's risk, making it easier for them to offer significant capital at favourable rates. For large-scale projects with budgets reaching tens of thousands or more, property as security increases the likelihood of a positive decision.

For instance, if you aim to borrow £100,000 towards a construction project and offer a property valued at £500,000 as collateral, it mitigates the lender's risk, enhancing the chances of securing the loan at favourable terms.

However, it's not foolproof. Each lender assesses credit risk differently, so while having property as collateral can be beneficial, it may not guarantee a positive response.

Another significant advantage of using property as collateral is that it usually means access to more favourable interest rates. Security diminishes debt risk, translating to lower overall finance costs.

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Benefits of a loan secured against property:

In summary, leveraging your property asset as security can provide the following advantages:

  • Increased borrowing capacity.
  • Lower interest rates.
  • Extended repayment terms.

A commercial mortgage, a type of loan secured against property, may have terms ranging from a few years to 25, with a loan-to-value ratio potentially reaching 100% of the property value.

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The Downside:

Now, let's delve into the challenges you might encounter when considering or opting for a loan secured against property.

  1. Secured loans take longer to arrange: If you require working capital urgently, a secured loan may not be the ideal solution. The valuation process and underwriting procedures for commercial property can extend the setup time to weeks, compared to the quicker approval of short-term unsecured finance. If time is critical, exploring short-term unsecured finance options might be more suitable for addressing sudden cash-flow gaps or capitalising on immediate opportunities.‍
  2. Risk of losing the property: Failure to meet loan repayments secured against your business property puts it at risk of repossession. The lender has rights over the collateral if your business cannot fulfil its debtor obligations. This risk intensifies if the loan is secured against your personal property, like your family home. Maintaining repayments involves effective cash-flow planning, budgeting, and a solid strategy for utilising the extra capital to generate sufficient cash flow, cover interest, and maintain profitability.‍
  3. Potential damage to credit scores: Both you and your business have credit scores, crucial factors in lenders' approval processes. Failure to meet agreed repayments negatively impacts these scores. Any defaults remain on your credit record for six years, making it challenging to access finance at competitive rates during that period. To safeguard your creditworthiness, meticulous attention to repayment commitments is essential.

In conclusion, while loans secured against property offer significant advantages, understanding and mitigating the associated risks are crucial for informed financial decisions. If you're considering such a loan, thorough planning and a clear understanding of your business's financial health are imperative. You can speak to us for assistance in assessing your options and determining achievable solutions within your time frames

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Is a Secured Business Loan Your Best Choice?

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.
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Critical Factors in Loan Selection:

  • Purpose: Clearly define the purpose of your loan, whether it's for working capital, expansion, or other business needs. Aligning the loan with your specific objectives is paramount.
  • Loan Amount: Determine the precise amount you wish to borrow. A clear understanding of your financial requirements will guide you in selecting the most suitable financing option.
  • Repayment Term: Evaluate the duration over which you can comfortably repay the debt. Tailoring the repayment term to your business's cash flow and financial projections is key.
  • Assets as Security: Consider what assets you can leverage as security. While property is a common form of collateral, alternative assets may also be viable options.


Personal Guarantee:

In situations where using assets as security isn't feasible, explore the option of taking out a business loan by signing a personal guarantee. This commitment involves personally settling the debt if the business faces challenges in repayment.


Consult with Us Before Committing:

Our team of finance specialists handles a diverse range of inquiries from businesses daily. Whether you're seeking short-term working capital, planning significant growth projects, managing credit challenges, or demonstrating a strong financial track record, we can assist.

Working with over 250 finance providers, we offer tailored funding solutions for businesses in various situations. Whatever your borrowing needs and unique circumstances, we're dedicated to helping you find a viable path forward.


Let Us Support Your Business Plans:

Contact us today, and let's discuss how we can assist you in securing the finance you need to fuel your business plans or get a FREE quote by filing in this short form.

Jamie Davies
Managing Director

As a founder of multiple businesses, Jamie believes that mindset, discipline and ambition are key drivers for success, both for his businesses and for his clients. 

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Disclaimer: Spark Finance Ltd (Registered office - 18 John Stow House, London, England, EC3A 7JB, Registered Number 10128297) helps UK firms access business finance. Spark is a credit broker, not a lender. Any quotes provided are for information purposes only and subject to status and separate lender terms and conditions. Applicants must be aged 18 and over.  Guarantees and Indemnities may be required.  Spark Finance may receive commission from lenders  which may vary depending on the lender, product, or other permissible factors. The nature of any commission model will be confirmed to you before you proceed.

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