Taking out a business loan is a common way of financing a new business or the growth of an existing one – but there are key considerations that borrowers and lenders will have to make.
Borrowers, typically business owners or sole traders, will need to decide how much they want to borrow and how much they can realistically repay.
Upon application, lenders will decide what level of risk the borrower represents and whether they can offer the necessary amount.
One of the ways that borrowers can increase their appeal to lenders is by applying for a ‘secured’ loan – a loan which secures the funding against the business or individual’s assets.
Why take out a secured loan?
Done properly with due diligence, a secured loan can open a lot of doors for growing businesses.
As it offers security to the lender, loan providers are typically willing to offer a larger loan than for unsecured amounts, which can provide vital funding for business activities.
Before accepting terms on a secured loan, borrowers should seek legal advice regarding the agreements they are required to enter into to understand the extent of their liability and what assets are at risk if they fail to make repayments.
What assets do lenders look for?
This depends on how much borrowers are looking to take out and what assets they own that can be put up as collateral. It may also depend on the lender’s specific borrowing policy.
As a rule of thumb, the more you borrow, the more security the lender will require.
Examples of security are legal charges, debentures, personal guarantees, corporate guarantees or fixed charges over other valuable assets of the borrower such as intellectual property or valuable equipment.
In practice, this might mean that, if a business fails to make repayments on a loan, it’s directors may find assets such as real estate or personal possessions (if they have charged personal assets to secure the corporate lending) are sold to recover the sums due under the loan agreement.
The costs associated with the security will depend on the security sought by the lender, but can vary from £500 to £1,500 (plus VAT and disbursements) each.
It is also normal practice for the borrower to pay the lender’s costs for preparing and putting the security in place.
Both parties should agree any legal costs in advance before incurring said costs.
Before entering into a loan agreement, borrowers should seek independent legal advice to ensure that they fully understand the risks to personal and business assets.
We can provide impartial, straightforward legal advice to anyone considering providing personal guarantees to a loan or financing.
Contact Dashna Morarji-Sagoo by emailing DashnaMorarji-Sagoo@palmerslaw.co.uk or calling 01375 484443 or BJ Chong by emailing BJChong@palmerslaw.co.uk
The contents of this article are intended for informational and educational purposes only.