Secured term loan overview
What is a secured term loan?
A secured term loan is the classic method of getting funding for your business. Secured term loans are loans provided for a fixed time period that are ‘secured’ by a physical asset that is owned by the business or one of its directors and has an assessable value. This asset is often referred to ‘collateral’ or ‘security’. Common forms of collateral used for secured term loans include residential property, commercial property, vehicles, machinery or other equipment.
Pledging an asset as collateral for a secured term loan means that you are effectively giving the lender permission to take possession of the asset if you default on the loan and can’t pay it back.
> The key feature of a secured loan is that it is backed by collateral as part of the lending agreement. Lenders will charge a lower interest rate and provide the facility for a longer time relative to other business loan products as secured term loans are inherently less risky as the lender has a relatively clear way to recover any potential losses by taking possession of the asset.
Benefits of a secured term loan
If an asset is pledged as collateral for a secured term loan there is a high chance that the lender will be able to recover a substantial portion (if not all) of the loan amount in the event of a default, resulting in less risk for a lender when compared to most other business loan products in the market.
Due to the relatively low level of risk in providing a secured term loan, lenders will charge much lower interest rates on and will provide facilities for much longer time periods. For commercial property, secured term loans can be provided for up to 30 years!
Another benefit of a secured term loan is that if you have an asset that isn’t being used as security for another loan you they can be applied for and obtained relatively quickly when compared to other business loan products.
Drawbacks of a secured term loan
The consequence of offering an asset to use as collateral for your loan mean that if you default, then it could result in the asset being seized by the lender and sold off. This is done so the lender recuperates the amount of their loan and therefore minimises their losses.
When providing an asset as security, you have to be careful and be 100% sure that you will be able to pay back the loan so that you will not have worry about losing the asset.
Also be sure to look out for are any fees attached to the facility. Secured term loan facilities can often come with early repayment fees if you pay back the loan early. Lenders will often include this fee as a way of profiting from the loan in the event that they don’t receive the expected course of interest payments because the loan is paid off early.
Applying for a secured term loan
In order to provide approval for an secured term loan, lenders will need to be comfortable that the asset will provide enough value to cover the value of the loan in the event of a default.
To assess the suitability of the asset and the health of your business, lenders will often require you to provide a combination of the below as part of a secured term loan application:
- Details on any income the asset generates
- Copies of all sales & transfer documents to prove ownership
- Details on any existing claims over the asset (i.e., is part of it being used as security for another loan or does anyone else have a potential claim on ownership of the asset)
- Details of any registered valuation that has been completed on the asset
- Details of any insurance policies taken out on the asset