Key Takeaway Table
| Key Point | Description |
|---|---|
|
Definition
|
Security is a fundamental concept in lending. It's any significant asset or property a borrower pledges to secure the loan. In the event of a default, the lender can legally take possession of the security to recoup any losses. Security can also be guarantees given by directors, guarantors and the business itself. However, in this article, we will focus on property and assets as security.
|
|
Functions of Loan Security
|
Security benefits both the lender and the borrower. The asset protects the lender in the case of a default, while it improves loan rates and terms for borrowers.
|
|
Types of Security
|
Borrowers can pledge viable personal or commercial real estate, cars, vans, trucks, water vehicles, investments, business assets, heavy machinery, and more as long as they qualify.
|
|
Qualifications for Security
|
Assets need to have sufficient value to be considered as security. They also need to be easily sellable and in a stable and well-kept state. They should be legally owned with a title, insured or insurable, and comply with any regulations like zoning or safety codes.
|
When you apply for business loans, you have the option to use a property or a significant asset to secure your loan. Loan security serves as a safety net for the lender, providing a form of protection in case the borrower fails to repay the loan. If the borrower defaults on the loan, the lender has the legal right to take possession of the security to recover the outstanding debt. Let’s take a closer look at what security is and its role in business loans:
Functions of Loan Security
Security plays a crucial role in business loans, protecting both the lender and the borrower throughout the loan process. Here are its main functions:
- Risk Mitigation for Lenders: Security provides a way for lenders to mitigate the risk associated with lending money. If a borrower fails to repay the loan, the lender has the right to seize the security to recover the outstanding amount. This reduces the financial risk for the lender and increases the likelihood of loan approval for businesses that may not have strong credit histories.
- Enables Larger Loans: With security, lenders may be more willing to offer larger loan amounts because the risk is offset by the value of the secured asset. This is particularly important for businesses that require substantial funding to expand, purchase equipment, or manage cash flow, as it provides them with access to the capital they need.
- Lower Interest Rates: Secured loans typically come with lower interest rates compared to unsecured loans. This is because the security reduces the lender's risk. Lower interest rates make borrowing more affordable for businesses, which can be crucial for their growth and sustainability.
- Better Loan Terms: Security can also provide borrowers with more favourable loan terms, including longer repayment periods. This can help businesses manage their cash flow more effectively, as they can spread loan repayments over a longer period to reduce the impact on their monthly finances.
Types of Security
Real Estate
This is one of the most common forms of security due to its high value and ease of valuation. Real estate includes any acceptable residential and commercial properties.
Vehicles
Vehicles like cars, vans, trucks, and boats can also serve as security for business loans.
Business Assets
Inventory, machinery, accounts receivable, and other significant assets can be pledged by businesses as security for loans.
What Makes a Property Qualified to be Security?
For a property or asset to qualify as security for a loan, it must meet certain criteria that make it valuable and reliable from the lender’s perspective. These criteria ensure that the asset can sufficiently protect the lender in case the borrower defaults on the loan. These criteria include:
1. Sufficient Value
The asset must have a value that is equal to or greater than the loan amount. Lenders often apply a loan-to-value ratio (LVR) to determine the maximum loan amount they are willing to offer based on the value of the security.
2. Marketability
The asset should be easily sellable, meaning there is a readily available market for it. This ensures that the lender can quickly sell if necessary to recover the loan amount.
3. Legal Ownership and Clear Title
The borrower must have clear legal ownership of the asset, free of disputes or other claims.
4. Durability and Stability
The asset should be in an acceptable state and not be subject to rapid depreciation or obsolescence.
5. Insurance
Typically, the asset must be insurable. Insurance protects against loss or damage, ensuring that the asset retains its value over the term of the loan. Lenders often require insurance policies to name them as an interested party.
Get Secured Loans for Your Business
If you have high-value assets, you can apply for secured loans for your business. Secured loans can get you higher loan amounts, lower interest rates, and longer loan terms. This way, you can get the funding you need for any business purpose. We can help you find the best secured loans fit for your unique needs and financial situation. Talk to us today to learn more.
