Secured business loans: what you can borrow against

A secured business loan is credit that is backed by property or other assets you own. The British Business Bank describes a secured loan as one backed by property or assets that you own, and says that if you default the lender has the right to take possession of the asset and turn it into cash to recover its money.

Because the lender has something to fall back on, it carries less risk, and that is why secured lending is commonly used for larger or longer-term borrowing. What a lender will actually offer depends on the asset, the business and the lender’s own criteria, so every figure in a quote is subject to status.

A secured loan is one of several ways to borrow. Our guide to secured and unsecured loans compared sets the two side by side, and our page on unsecured business loans covers the other route.

You can borrow against property, vehicles, machinery and equipment, stock, and in some structures the money your customers owe you. Which of these a lender accepts depends on what you own, whether it is already pledged elsewhere and how easily it could be sold.

A director can also be asked to support a business loan with a personal asset, usually through a personal guarantee. That is a separate promise and is covered further down.

A lender takes security by having the company grant it a charge. Companies House defines a charge as the security a company gives for a loan, and says a mortgage is one type of charge.

Two forms come up most often. The Insolvency Service describes a fixed charge as the right of a creditor to recover its capital and interest from definite and ascertainable assets. A floating charge is different: it hovers over a changing pool of assets, and only when something triggers it does it settle on the property. After that the company can no longer sell the charged property without the chargeholder’s consent. A lender can combine both in a debenture.

The charge must be registered at Companies House within 21 days, starting the day after the charge is created. The company, its agent or the lender can do the registering, and in practice it is usually the lender or its solicitor. Companies House warns that if a charge is not registered in time, it may be difficult to recover the debt if the company becomes insolvent, and only a court can allow late registration.

You can usually borrow only a percentage of an asset’s value, not all of it. The British Business Bank describes this for property-backed lending: the lender advances a certain percentage of the security value, known as the loan-to-value, or LTV, ratio.

Our guide to loan to value covers the maths. The table below uses made-up round numbers to show the arithmetic only.

The figure the lender uses is its own valuation, which can be lower than what you paid or what you think the asset is worth. An asset that already carries a charge for another lender may support little or no further borrowing.

If you default, the lender can enforce its security: it can take the asset and turn it into cash to recover what it is owed. For a company with a floating charge covering substantially all its property, the Insolvency Act 1986 lets the holder of a qualifying floating charge appoint an administrator.

In an insolvency the order in which creditors are paid matters. A fixed charge holder is paid from the proceeds of the charged assets. Certain HMRC debts, including VAT, PAYE Income Tax, employee National Insurance and CIS deductions, rank as secondary preferential debts ahead of floating charge holders. Where a floating charge exists, a prescribed part of the company’s net property is also set aside for unsecured creditors: 50% of the first £10,000 plus 20% of the rest, capped at £800,000 for charges created from 6 April 2020.

The core difference is what the lender can claim if things go wrong. An unsecured loan, in the British Business Bank’s words, does not require any asset to be put up as collateral, though lenders typically ask for a personal guarantee instead.

Neither is automatically better. Compare the total cost and what you are putting at risk, as set out in our guide to comparing business lenders.

Lending to a limited company is outside the FCA’s remit, and the FCA’s guidance says loans secured on commercial premises are not regulated mortgage contracts because the property will not be used as a dwelling. Lending to a sole trader or small partnership borrowing £25,000 or less is within it.

A personal guarantee is a separate legal agreement in which the owner or director agrees to repay the loan personally if the business defaults or becomes insolvent. The British Business Bank advises independent legal advice before signing, and some lenders require the guarantee to be witnessed by a solicitor. Pledging a home or other personal property is a serious step, so take legal advice before you do it.

A secured loan is the wrong option when losing the asset would stop the business trading, or when the loan is not the right fix for the problem.

• The security is something the business could not trade without, such as its only premises or key machine.
• The money is for a short-term gap that invoice finance or an overdraft would cover without tying up property.
• A director would have to pledge their own home to make the deal work.
• The repayments depend on a sale or contract that has not yet happened.

It may also make sense to look at start-up business loans or the Government-backed route in our guide to the Growth Guarantee Scheme. Under the scheme the guarantee is to the lender and the borrower always remains 100% liable for the debt, so it is not a safety net for you.

Capzy is a credit broker, not a lender, and is paid by the lender. For secured borrowing we introduce businesses to lenders in our directory of secured loan lenders and set out what comes back so you can compare it.

You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and every offer is subject to status and lender criteria. We do not give legal or tax advice, so speak to a solicitor before granting security or a guarantee.