Risks & rewards of a secured business loan

Small businesses in South Africa can often face challenges when it comes to securing funding from traditional banks and financial institutions, especially if they haven’t got a great credit score. However with the help of alternative lenders and marketplace platforms like FundingHub getting access to funding is a lot simpler. A secured business loan is a great option for a SME looking for finance to grow their operations, purchase equipment or cover short-term cash flow needs. However, like any financial decision, secured business loans come with both risks and rewards, and it is important for small business owners to carefully consider their options before committing to this type of loan.

Before we go down the route of explaining what the risks and rewards of a secured business loan are, let’s walk you through a bit of the financial terms you’ll need to understand before hand.

What is a secured business loan?

Secured business finance is a form of borrowing that is secured by assets. This means that the asset is your security, and if the borrower does not pay back the loan, the lender can take the assets as compensation. The loan is secured by the equity in a person's home, commercial property, machinery, vehicle etc. The borrower then uses their asset as collateral to get a business loan or personal loan approved.  

*Secured finance can otherwise bereferred to as asset-based lending.  

What assets can I use to get asecured business loan in South Africa?

This varies from lender to lender,but generally, through FundingHub these are the most common asset types thatget approval for secured finance.  

• Property e.g. home, commercial property or farm  ‍
• Equipment – machinery, tractor, computer equipment      ‍
• High-value movable assets – e.g. boat or a helicopter  

Essentially lenders are looking for assets that are high-value, non-depreciating assets that the borrower owns and can put up as collateral.  

Read our full post on the various assets you can use to get a secured business loan.

How can I apply for a secured business loan in South Africa?

The application process is pretty simple, and FundingHub can help you compare secured business loan offers in under 5 minutes. There are a couple of requirements for an asset backed loan that differ from other types of business loans.  

If you meet the following criteria, you’ll be considered for a secured loan:  

• Six months trading history  

• An average of R40k+ revenue per month  

• A high-value/non-depreciating asset (it will need to be paid for in full)

If you meet these criteria, all you’ll need to do is fill in the application on FundingHub and then you’ll be matched with various lenders where you can select the best secured loan offers suited to your business.  

Okay let’s jump right in, so you have a better understanding of all the benefits and possible downfalls of taking out a secured loan.

5 Rewards of a secured business loan  

1.   Lower interest rates

One of the biggest rewards of a secured business loan is that it typically offers lower interest rates compared to unsecured loans. This is because the loan is secured against an asset, which provides the lender with a degree of security. As a result, small business owners can enjoy lower monthly repayments and a lower total cost of borrowing over the life of the loan.

2.  Increased Loan Approval Chances

Small businesses often struggle to secure loans due to a lack of credit history or low credit scores. However, a secured loan gives lenders a greater sense of security, which can increase the chances of loan approval for small businesses. This is because if the borrower defaults the assets can be seized (we’ll get to this in the risks don’t worry).

3.  Improved Credit Score

Repaying a secured business loan on time (or any loan for that matter) and in full can improve a small business's credit score, which can be beneficial for future borrowing opportunities. If you’d like some more suggestions on how to improve your business credit score, follow these tips.  

4. Access to Larger Loan Amounts

Secured business loans typically provide access to larger loan amounts compared to unsecured loans. This can be particularly beneficial for small businesses that need to make significant investments in equipment, expand operations, or cover other costs.

5.  Uninterrupted Ownership of the Collateralised Asset

A huge benefit for any business owner is that if they have put up their assets as collateral, they can still use or occupy the asset. So if a business owner has used their personal home as security for the secured business loan, they’ll still be able to live in the home, or if they have put their helicopter up as security they’ll still be able to fly around ;)

3 Risks of a Secured Business Loan

1.   Loss of Assets

This one is a biggie, if you’ve had a secured business loan approved and the loan is secured against a valuable asset, this means that the lender has the right to seize the asset if the loan is not repaid on time and in full. This can result in the loss of valuable assets, such as property or equipment, which can have a significant impact on a small business. You need to think carefully when applying for a secured loan, and always think about the asset that you are using as security, is it something you’d be devastated at losing e.g. your personal home?

2.  Possible Decreased Collateral Value

Another risk of a secured business loan is that the value of the collateral may decrease overtime. This can result in the loan becoming "underwater," meaning that the loan is worth more than the collateral, which can make it difficult for the small business to refinance or repay the loan. Do your research and chat with your lender about this before signing the loan agreement, you want to make sure that the collateral doesn’t lose significant value over time.

3.  Limitation on Future Borrowing

By putting up valuable assets as collateral, a small business may be limiting its future borrowing potential. This can be a concern for businesses that need to secure additional funding in the future, as they may not have the assets to provide as collateral. You can’t use the same collateral again for a different loan, it can only be used once as security for a secured business loan.

Starting yourbusiness finance journey shouldn’t be a complicated process. It’s always bestto weigh up the risks and rewards of any loan, before committing and signingthe loan agreement. Small business owners should always consider theirfinancial needs, the value of their assets, and their ability to repay the loanon time and in full before making a decision.

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