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Can I use property as security for a business loan?

PUBLISHED ON: 27/09/2023

What to consider when using property as collateral for a business loan?

Secured business loans require one or more assets to be put forward as collateral. This protects the lender from financial loss if a company cannot afford to keep up with the repayments at any stage.

It reduces their risk of lending when compared with unsecured loans. A business loan secured on property or another valuable asset can be easier to access for this reason, and typically offers a lower interest rate than an unsecured loans.

Using property as collateral on a business loan

Lenders prefer assets of a high value that can be resold relatively quickly in the event of default. This allows them to recoup their money with few issues and as property is one of the highest value assets available, it’s commonly used to secure a business loan.

If you purchase business premises for your own use, an owner-occupier mortgage will be secured on the commercial property. Alternatively, you may decide to purchase a business property to rent out using a commercial investment property mortgage.

This type of secured business loan enables you to purchase property over time, which may be up to 25 years.

What happens when you use property as security for your business loan?

The lender will value any asset that’s put forward as security and establish whether you own it outright or if you part-own it with others. Some lenders accept personal property as security even though the loan is for a business.

It’s highly advisable to seek professional assistance before going ahead with a secured loan, however, particularly if you’re placing your home at risk. If the property already has a mortgage against it, the lender will register a legal charge. This provides official recognition that it’s been used as security and enables the lender to claim their legal interest.

Benefits of a secured business loan

Helps your business grow

A secured commercial loan that uses property as collateral can provide the means to develop your business as long as you keep up with the repayments over the full loan term.

Access to favourable loan terms

A business loan secured on a property can provide access to larger sums given the high asset value. Loan terms may also be longer, and the lower interest rates associated with secured loans can make monthly repayments more affordable.

Accessible if you’re a start-up or have bad credit

If your business has a bad credit rating you may still be able to access this type of lending as the loan is secured and presents a lower risk to the lender. Eligibility isn’t based on trading history either – rather the value of the asset – so start-ups may be able to access valuable funding in this way.

It’s also important to be aware of the potential risk of having your property repossessed, however, and UK Business Finance can ensure you understand all the potential issues. We’re experienced commercial finance brokers and offer free consultations, so please get in touch to find out more.

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