We break down some common types of business finance to answer these questions.
Asset Finance
Security required: Yes
Form of security often required: Security interest in asset(s), Personal Guarantee
Asset finance is a type of funding designed to help businesses spread the cost of purchasing one or more assets, where the assets being purchased are offered as a security interest to the lender, either partially or wholly.
This type of finance can also be used to release cash that may be tied up in assets already owned by means of refinance, where the existing assets are offered as a security interest.
Asset finance is most suitable for assets that meet the DOMS criteria (find out more here), and lenders will often purchase the assets directly for the business, rather than transferring the cash directly to them.
Each lender will have specific rules about the proportion of the asset value they are willing to lend, known as loan-to-value (LTV). If the business requires a higher amount of funding than the lenders maximum LTV against a single asset, the lender may accept additional security such as further assets, or a personal guarantee (PG).
Find out more about asset finance here.
Unsecured Business Loan
Security required: Sometimes
Form of security often required: Personal Guarantee
The term ‘unsecured’ suggests this type of finance is free from any requirement of security, however this is not always the case.
Lenders will make an assessment of the level of risk a business poses to determine whether or not they will offer finance. If a business is identified as very little risk the lender may offer an unsecured business loan without requiring any form of security, however if the level of risk is considered too high to do so, they may still offer finance on the basis a form of security is offered.
This may seem counterintuitive to the name, but is common practice in business lending. Typically, lenders favour security such as Personal Guarantees for Unsecured Business Loans, but some lenders may accept other forms of collateral.
It is essential to read through the terms and conditions before entering into any business credit agreement, and to make sure you have a full understanding of any security requirements, and possible implications.
Find out more about unsecured business loans here.
Working Capital Loan
Security required: Sometimes
Form of security often required: Personal Guarantee
Working Capital Loans are a form of short-term business finance designed to help manage day to day operations. They are popular method of finance amongst SMEs, however not all Working Capital Loans are security free.
Every business is different, and will be individually assessed by the lender to determine the likelihood of default against the loan. Businesses that pose a low risk to the lender will often be offered working capital loans on a completely unsecured basis, however this is not the case for all businesses. If a business is considered to be at risk of missed or late payments, they may still be offered a working capital loan, but on the basis that they provide a form of security.
Commonly this will be arranged as a personal guarantee, however each lenders will have their own security preferences, and may accept other or additional forms of security.
Revolving Credit Facility
Security required: Commonly
Form of security often required: Personal Guarantee
Revolving Credit Facilities, also known as RCFs, are a type of working capital loan that work similarly to an overdraft (Find out more here). You can find out more about RCF security requirements under Working Capital Loans.
Merchant Cash Advance
Security required: Sometimes
Form of security often required: Personal Guarantee
A Merchant Cash Advance, also known as an MCA or PDQ loan, is type of finance that is based on a business’s average monthly card takings. A financier will evaluate historic card payments taken by a business, and offer a lump sum in advance (the loan) with a percentage of the future card sales being used to repay the advance. Find out more here.
The requirement of security for an MCA is dependent on a number of factors that determine how much risk the business is considered to be to the lender. In cases where the business poses little risk based on its financial history and loan requirements, an MCA may be offered on an unsecured basis, however this may not be the case for all.
If a business is considered risky, the lender may still offer an MCA, but on the condition that a form on security is provided. Commonly this includes a Personal Guarantee (PG), but each lender may accept a different form of security depending on their preferences.
Bridging Loan
Security required: Yes
Form of security often required: Legal charge, Personal Guarantee
Commercial bridging loans are a short-term type of funding, typically used to ‘bridge’ the gap between a payment falling due and either the main source of finance being available, or funds being received from another source, such as the sale of an asset. Find out more here.
Bridging loans are typically considered risker than other forms of business finance, therefore lenders will require a form of security to lower their own risk. Commonly the type security required is a legal charge over one or more properties, development land or farmland.
Lenders will often require a Personal Guarantee in addition to the legal charge(s), depending on the situation.
Invoice Finance
Security required: Yes
Form of security often required: Invoices, Debenture, Personal Guarantee
Invoice financing is a general term that describes a variety of asset-based financing facilities, where businesses sell their invoices/accounts receivables to a third party for a percentage of the invoice value. Find out more here.
A key advantage of most invoice finance agreements is that no fixed assets are required as security. In the case of spot factoring the only security usually required is the individual invoice, whereas for ongoing factoring the complete sales ledger will be necessary.
The security requirements can however vary between lenders and should be considered choosing the right lender. Some financiers will require an all-asset debenture over the company, whereby if the business were to close, any repayment to the factor would be paid as a priority. Some lenders may also request that any other financiers waive their security over book debts.
In some cases, lenders may also request a personal guarantee or warranty depending on the level of risk the business is considered to pose.
Commercial Mortgage
Security required: Yes
Form of security often required: Legal charge, Personal Guarantee
Commercial mortgages, often referred to as business mortgages, are a form of secured borrowing, mainly for business owners looking to purchase a property for commercial use. Find out more here.
Commercial mortgages typically work in the same way as a personal mortgage. The financier will loan the borrowed amount whist taking security in the form of a legal charge over the property being purchased. The charge will remain in place until the full settlement is repaid.
In cases where additional security is necessary, lenders may require additional charges over other properties in order to reduce their risk. Some lenders may also require one or more Personal Guarantees in the case of commercial mortgages.
Summary
In all of the above cases the type, and level, of security required is depended on the perceived level of risk posed by the business, as well as the lenders preferences. As each finance application is different the only way to find out exactly what security is required is to speak directly with the lender, but it’s useful to know what to expect.
