Secured business loans

A secured business loan is backed by a charge over property, equipment or the company’s assets as a whole, which the lender can sell if the loan is not repaid. Security lets a lender offer larger sums, longer terms and lower pricing than unsecured lending. In return the charged assets, and often a director’s personal guarantee, stand behind the debt.

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How a secured business loan works

A lender that takes security has a claim on specific assets, or on the business as a whole, that ranks ahead of other creditors if the company fails. That changes the lender’s arithmetic. It can lend against the value of what it could sell as well as the cash flow it expects, so sums can be larger and terms longer. Loans secured on property run for many years. Loans secured on equipment are matched to the working life of the machine.

The security is set out in a charge, signed by the company and registered at Companies House. A lender can take a charge over a single asset, such as a building or a lorry, or a debenture over everything the company owns now and in future. Many lenders also ask the directors for personal guarantees, so a secured loan can put both company assets and your own behind the debt.

Security sits alongside affordability. The lender still checks that the business can meet the repayments from its cash flow. It expects the repayments to come from trading, and treats the security as its fallback if trading fails.

Forms of security

Legal mortgage
A charge over land or buildings, registered at HM Land Registry as well as Companies House. The lender can take possession and sell the property if the loan is not repaid.
Fixed charge
A charge over a named asset: a property, a machine, a vehicle, a patent or a trade mark. The company cannot sell or dispose of the asset without the lender’s consent.
Floating charge
A charge over a changing pool of assets, such as stock and cash. The company deals with them freely in normal trading until the charge crystallises on default or insolvency, when it fixes on whatever is there at that moment.
Debenture
The document that gives a lender fixed and floating charges over all of the company’s assets. What a debenture is covers the clauses in detail.
Personal guarantee
A director’s promise to repay from personal assets. It can itself be backed by a charge over the director’s home, which works like a second mortgage.
Cross-guarantee
Where a group borrows, each company guarantees the others’ debts and gives security for that guarantee.
A mechanic working under the bonnet of a car in a garage

Debentures and charges at Companies House

Every charge a company creates has to be registered at Companies House. The deadline is 21 days beginning with the day after the charge is created, and only a court order can extend it. Any person with an interest in the charge can file it, and the lender’s solicitor files the form MR01 on most secured loans, because the lender carries the risk if the deadline is missed.

Under section 859H of the Companies Act 2006, a charge not registered in time is void against a liquidator, an administrator and the company’s creditors, and the money it secured becomes payable at once. A lender that misses the deadline loses its security in an insolvency, so lenders time the release of funds around registration.

The register is public. A future lender, supplier or buyer can see who holds a charge over your company and when it was created. When the debt is repaid, file form MR04 to record that the charge is satisfied, or the old charge will still show as outstanding. Removing a satisfied charge covers the steps.

Secured and unsecured lending compared

Secured loanUnsecured loan
What backs the debtA charge over property, equipment or all company assets, and often a personal guaranteeThe company’s cash flow and, usually, personal guarantees
Size of loanLinked to the value of the security and to affordabilityLinked to turnover, profit and affordability
TermCan run for many years, matched to the life of the assetShorter terms
Price for the same businessLowerHigher
PaperworkValuation, legal documents and a charge registered at Companies HouseLoan agreement and guarantee
If the company defaultsThe lender can sell charged assets or appoint a receiver or administratorThe lender sues, seeks a judgment and calls the guarantees

Secured or unsecured goes through the choice for your own business.

What happens on default

A loan agreement lists its events of default. Missing a payment is the obvious one. Breaching a covenant counts too: letting debt service cover fall below an agreed level, failing to deliver accounts on time, or selling a charged asset without consent. On a default the lender can charge default interest, demand repayment of the whole balance and enforce its security.

How it enforces depends on the charge. With a legal mortgage over property, it can take possession and sell. With a fixed charge over equipment, it can appoint a receiver to sell the asset. A debenture that includes a qualifying floating charge lets the lender appoint an administrator without going to court. The administrator takes control of the company and sells the business or its assets to repay creditors in their legal order.

Whatever the security fails to cover, the lender claims from the company as an unsecured creditor and from any guarantor. Assets sold under pressure fetch less than they are worth to a working business, and the costs of the sale come out first, so the shortfall can be large. Talk to the lender at the first sign of trouble. A restructured loan, a longer term or an agreed sale of one asset leaves you more choices than enforcement does. What happens if your business cannot repay a loan covers each stage.

A shortfall after enforcement

Illustrative example

A lender holds a debenture and a personal guarantee from the managing director, capped at £75,000. The company defaults with £250,000 outstanding. An administrator sells the charged assets for an assumed £160,000, and the assumed costs of the sale and the administration come to £20,000.

Outstanding balance
£250,000
Charged assets sold
£160,000
Costs of sale and administration
£20,000
Net proceeds to the lender
£140,000
Shortfall
£110,000
Called from the director under the capped guarantee
£75,000
Left for the lender to claim as an unsecured creditor
£35,000

Without the cap, the director could have been pursued for the full £110,000. In a real administration, preferential creditors can rank ahead of a floating charge on some of the proceeds, which would make the shortfall larger. Negotiate the cap before you sign.

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Questions people ask

What can I use as security for a business loan?

Commercial or residential property, vehicles, plant and machinery, stock, unpaid invoices and, with some specialist lenders, intellectual property. A debenture takes all of the company’s assets at once. The lender values each asset at what it could sell it for if the business failed, which is lower than its value to you. Asset finance and invoice finance use the asset or the invoices themselves as the security.

Do I have to put my house up as security for a business loan?

Not always. Some lenders ask for a personal guarantee backed by a charge over the director’s home, which turns the guarantee into a second mortgage. Others take a guarantee without security, or rely on company assets alone. Under the Growth Guarantee Scheme a lender cannot take your main home as security within the scheme. Take independent legal advice before you charge your home to secure business debt.

What is a debenture?

A debenture is the legal document a company signs to give a lender fixed and floating charges over all its assets, present and future. It is registered at Companies House and lets the lender appoint an administrator if the company defaults. Lenders take one on term loans, overdrafts and invoice finance. See what a debenture is for the clauses that matter.

How long does a charge stay on the Companies House register?

It shows as outstanding until somebody files form MR04 to record that the debt is paid. Companies House does not remove a charge on its own when the loan ends, and the company does not have to report satisfaction, but an outstanding charge on the record can put off future lenders and buyers. File the MR04 once the lender confirms the loan is repaid.

Can a lender take my house if my company cannot repay?

Only if you gave a personal guarantee or charged your home as security. With a charge over the house, the lender can seek possession through the courts. With an unsecured guarantee, it must first obtain a judgment against you, and can then apply for a charging order over your share of the home. Without either, the company’s debt stays with the company.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

Business loans

Unsecured business loans

Borrowing without a charge over company assets, and the personal guarantee lenders ask for in its place.

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Business loans

Term loans, secured and unsecured lending, government-backed schemes and how to compare offers.

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Commercial mortgages

A commercial mortgage is a long-term loan secured on premises the business uses or a building let to tenants.

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Refinancing business debt

Replacing existing business debt with a new loan, and clearing the old guarantees and charges when you do.

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Funding searches run on Swoop’s platform. Swoop Finance Limited is a credit broker and not a lender, and is authorised and regulated by the Financial Conduct Authority (FRN 936513). Buzz Accounting Ltd introduces businesses to Swoop and may receive a fee from Swoop when funding is arranged. Business funding is separate from the financial advice Equity & General Financial Services Limited gives through this website. Finance is subject to status, and a lender may ask a director for a personal guarantee.

Cover for a personal guarantee

If a lender asks you to guarantee the company’s borrowing, our advisers can advise on life cover for that debt.

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