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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:

Types of Security

The type of security accepted by lenders depends on the loan you’re applying for and the property itself. For instance, if you’re applying for a commercial real estate loan, the security is usually the commercial space. If you’re applying for equipment finance, the equipment is the security. You can still pledge property as security even if the loan isn’t tied to the asset. For instance, you can get a traditional term loan and use a significant asset to secure it. Here are some types of properties accepted by lenders:
House 1

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.

Fleet

Vehicles

Vehicles like cars, vans, trucks, and boats can also serve as security for business loans.

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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.

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