Accessing a business loan is currently more difficult than it has been for a generation. Banks appear particularly reluctant to lend to SMEs, as these businesses can experience uneven cash flows and unpredictable growth. This has resulted in many SMEs turning to alternative lenders who can provide secured finance. However, as with any commercial option, secured business loans have their pros and cons.
Secured business loans: the good points
One of the greatest advantages of secured business loans is the cost. Whilst unsecured lending has an easier application process and less risk for the borrower, the greater risk to the lender is reflected in a much higher interest rate. With secured business loans, you can borrow more substantial amounts at a much lower cost, providing stability to your business and enabling you to invest in the plant, equipment and people you need to succeed.
Further, secured lending will prove much easier to obtain than unsecured finance if your business has a limited track record or the principals have patchy credit ratings. Because the lending is secured on an asset that the financier can call up in the case of non-payment, these factors are far less important, though they will still be reflected in the interest rate of secured business loans.
You will also enjoy the flexibility of a much longer repayment period, thus reducing the monthly charge. Many alternative lenders use a panel of finance companies to deliver the most competitive rates and the widest choice of terms; this approach overcomes the problem of certain lenders being reluctant to invest in particular business sectors.
Secured business loans: the bad points
The biggest disadvantage of secured borrowing is the potential loss of the secured asset if repayments are not made. Of course, even with unsecured lending there is still a possibility that you could have to dispose of your assets to meet repayments, but with secure lending the process this is both more certain and a more direct process.
Another issue is the interest rate, which is more likely to be variable on secured business loans. This can work to your advantage if interest rates reduce, but you will need to plan carefully at a time of rate rises. Finally, a business that has secured a substantial, long-term loan may over-commit to new plant, equipment or talent in a dash for growth – it’s important to think cautiously and not over-expose yourself.
However, the advantages of secured business loans will outweigh the drawbacks for most businesses, making it an excellent way to fund both start-ups and ongoing growth.
For further information Download our Guidance Paper on 'How short term business loans can help your business finance problems', or view the following relevant pages:
- Business loans
- A guide to Short term business loans
- Emergency business loans
- Emergency business loan - why not use a bank
- A guide to Small Business Loans
- How quick business loans can encourage business turnaround
- How to get a quick business loan
- How to make business finance work for you
- A case study: How we helped a recruitment firm invest for growth
- A case study: Quick business loans could be the answer
- Business loan calculator