Secured Business Loans

Loans may be secured or unsecured. A secured loan is the same in this respect as a mortgage. The lender takes a legal charge on some property, and if you are unable to repay, the lender can force a sale of the property. The property is not necessarily the same as the item on which the loan is given. For example, you could get a loan to buy machinery, but it is secured on your own home. Loans secured on your own home represent a further degree of risk, which you must weigh up very carefully before committing yourself.

A legal charge on a property may be a first charge or a second charge. A first charge means that there is no other person or company with a prior legal charge over the property. A second charge means that there is someone else with a first charge. The lender's security is therefore relegated to a second position. If the worst were to happen, the property would be sold, and the proceeds would go first to repay the lender with the first charge. Only if there was something left over would the person with the second charge get their money. In theory, it is also possible to have a third or fourth charge, or even more. In practice, however, it is rare to see more than a second charge.

A lender who has to take a second charge will therefore do two things:

• They will get a valuation of the property, and find out the amount of the first charge, to see if there is enough value in the property to support their second charge. You, the borrower, would have to pay for this valuation.

• They will charge more for the loan to cover the increased risk of taking a second charge.

Negotiating the Loan

The terms are not fixed in concrete. Part of the overall negotiation with a bank consists of agreeing their charges and the interest, and the repayment term. Try to keep the repayment term within the expected life of the asset. This is for your benefit as well as the bank's.

The facilities granted to you by the bank will be reviewed regularly. Be prepared to renegotiate the terms when it comes up for review. The bank will expect you to negotiate - you are, after all, operating commercially as much as they are.

Here are some tips for negotiating a loan or facility:

• Ask for at least 10% more than you need.
• Ask for at least 25% longer to repay than you need.
• Do not agree to too much security. Work out the bank's maximum exposure to loss, and agree to that much. If they ask for double that amount, it is too much.
• Try to avoid having to give a personal guarantee - the bigger your business, the more likely this is.
• Start with getting acceptance of the proposal - leave negotiation of rates until the end.
• Get the bank to confirm all terms in writing, and get copies of all agreements you have signed.