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NGSouth Africa Lead
A secured business loan allows to you to access finance by offering up an asset such as property as security against the amount you borrow
Page written by Alastair Woods. Last reviewed on October 30, 2024. Next review due 2025.
If you’re a Nigerian business with assets and you’re looking for capital to grow, then securing a business loan against one or more your assets could be the ideal way to raise the funding you need. By taking security, the lender is much less likely to lose money should you fail to keep up the repayments. This means you will be more likely to be approved for a secured loan, as well as be offered lower interest rates, longer terms, and larger loans for your business. Between the banks and the alternative finance market, there is a broad range of lenders in Nigeria, each offering a variety of lending products.
A secured business loan allows you to use an asset – or the total value of multiple assets – as security against the amount you borrow. The lender uses your asset(s) as a form of guarantee and is therefore often able to offer better repayment terms than you’d find with an unsecured loan.
Business loans are typically secured against property, equipment, machinery or land – but lenders might use any high-value assets that either you or your business might own. There are other types of secured lending though. For example, invoice finance allows you to use your invoices and accounts receivable (i.e. money owed to your business) as security for a loan.
With a secured loan, the security reduces the risk for lenders, therefore increasing your chances of getting a loan, but also allowing you to borrow more money, for a longer term – and you’ll be offered better interest rates compared to those for an unsecured loan.
If you’re looking to grow your business, perhaps by investing in new equipment or taking on additional staff, there are many banks and non-traditional (alternative finance) lenders who can offer your business funds. If you like the idea of fixed, monthly repayments within an agreed time frame, a business loan (whether secured or unsecured) could be your best option.
Secured lending is also known as asset-backed lending.
A word from Andrea
"A secured business loan allows you to use an asset, or the total value of multiple assets, as security against the amount you borrow. The lender uses your asset as a form of guarantee and is therefore able to offer better repayment terms than you’d find with an unsecured loan. By taking security, the lender is much less likely to lose money should you fail to keep up the repayments, meaning you will be more likely to be approved for a secured loan, as well as be offered lower interest rates, longer terms, and larger loans for your business."
Secured business loans work in very similar ways to most other types of business lending. The lender will agree to lend your business a certain amount, based on your needs and how much security you can put up to guarantee the loan.
(This is in contrast to an unsecured business loan, where the lender will typically specify the loan amount as a multiple of your annual business turnover.)
The process is a bit like applying for a mortgage and may take several weeks, depending on the complexity of your situation – the lender will have to value any assets you’re putting up as security. In addition, if you’re using property as security, the lender is likely to place a legal charge on the property.
You receive your cash and subsequently repay your loan in monthly instalments over a fixed time frame. You can choose to take out a short-term loan or medium/long-term loan (i.e. ‘term’ loan), depending on your business needs.
If you fail to make the repayments, the lender might claim ownership of the assets that you put up as security and use this to recover the funds.
Here’s a simple example of a secured loan:
Pros
If you offer assets as security against a loan, lenders take on less risk than they would with an unsecured loan, increasing your chances of being approved if you’ve been declined for an unsecured loan. Security also means lenders are more likely to lend larger amounts, over longer time periods, and at lower interest rates..
Here’s a bit more detail:
Cons
These aren’t all exactly ‘cons’ – rather they’re ‘things to consider’ before you take out an unsecured business loan:
The criteria in Nigeria for a secured business loan tend to be more relaxed than those for unsecured lending, though requirements will vary between lenders.
If you or your business owns any high-value assets you’re likely to be eligible for a secured business loan, especially if you’re prepared to put up business or personal property as security against the loan.
A lender will assess the value of the asset – or assets – and will want to know what you’re borrowing the money for. They will also check the trading history of your business. If you’re a startup with no or minimal trading history they will take a view – it’s your assets they care more about.
Lenders will take a view on previous credit problems, but if you have a poor credit history you’ll still need to demonstrate that the primary source of repayment i.e. the business is viable and able to service the loan
Your business also needs to have been registered within Nigeria for at least three months.
In theory, you can borrow up to 100% of the value of the asset(s) you’re using as security. These assets are usually commercial property, equipment or land. Some lenders will consider a net value of multiple assets including, for example, your personal assets such as your residential property, car or shares.
In practice, requests are typically 50-70% of the value of the asset(s). So, depending on the value of your asset(s) you could access a secured business loan from ₦5,000 to ₦5m.
A secured loan uses your assets as security. Usually these assets are tangible items such as commercial property, machinery or vehicles, but there are other types of secured lending. For example, with invoice finance, you’d use your trade debtors as security.
If you can’t repay your secured loan, the lender can sell the assets to recoup the cost of the loan, which reduces their risk.
With an unsecured loan, on the other hand, the lender has no security and therefore cares much more about your business profile, for example, your business turnover, trading history and credit score. The lender may also look at your personal credit history and personal assets, and might ask for a personal guarantee.
Secured lending is usually cheaper (i.e. interest rates are lower) than unsecured lending because the lender is taking on less risk. Lenders might also offer longer terms and larger amounts.
Unsecured business loans are usually simpler and quicker to arrange, compared to secured loans, because there’s no need for the lender to inspect or value any assets. These valuations may involve legal costs, which you’ll have to pay upfront with a secured loan. By contrast, an unsecured loan doesn’t usually involve any upfront costs.
If by ‘easier’ you mean more accessible, then yes, as long as you have assets to secure against the loan. From the lender’s perspective, there’s less need for you to have a good trading history or a good credit history, because any assets you use are a form of guarantee for the lender.
Lenders will take a view on previous credit problems, but if you have a poor credit history you’ll need to demonstrate a sustained period of growth.
This makes secured loans a good option for a startup without any annual accounts or trading history, or a business with a poor credit history.
To qualify, your business needs to have been registered within Nigeria for at least three months and needs to own a high-value asset that you can put up as security against the loan.
The criteria for a secured business loan tend to be more relaxed than those for unsecured lending, though requirements will vary between lenders.
‘Easier’ does not equate to ‘quicker’ though. If you’re applying for a secured loan it may take considerably longer (possibly weeks) to access funds, compared with secured lending or other types of financing, because you’ll have to wait for the lender to complete any valuation and possibly organise any legal charges on property.
Yes. If you’re securing the loan against any of your assets, and you fail to keep up with the repayments as agreed with the lender, you may lose these assets.
In addition, if you’re a director offering a personal guarantee (i.e. offering personal assets such as your home as security) and your business then fails to make repayments, you become personally liable for paying off the debt.
It can be either. It’s for you to decide whether you want to use any of your assets as security against your borrowing.
If you want to borrow more than your assets are worth, or you’d prefer not to offer specific assets as security, you might choose an unsecured business loan. Once a lender agrees to the loan, you’ll get your cash fast and you’re unlikely to have to pay any upfront costs – but you’ll probably pay a higher interest rate and you’ll need to demonstrate a good track record.
A secured loan, on the other hand, will most likely be the cheaper option, though it’ll take longer to arrange (assets need to be valued). If you’re a small business or a startup and you don’t have a solid trading history or a good credit rating, you might have more success with a secured loan.
Between the banks and the alternative finance market, there is a broad range of lenders, each offering a variety of lending products.
You can use almost anything as security to guarantee a business loan in Nigeria, as long as it has value.
Lenders prefer assets that can easily be resold, hold their value well, are important to your business and are more valuable than the amount you want to borrow. This should be no surprise since the point of a secured loan is that the lender can use the security to recoup losses if you default on the loan.
When lenders value a business’s security for a secured loan, they will look at how ‘encumbered’ the security is (i.e. do you own it 100% or are there other parties involved?).
In practice, you can use any valuable asset as security for a business loan for example:
These are known as hard assets. Some lenders might also accept soft assets, for example, unsold stock in your warehouse.
Some lenders will consider a net value of multiple assets including, for example, your personal assets such as your residential property, car or shares.
Some lenders allow you to use cash as security. Be aware, however, that cash-secured business loans usually have different terms attached, compared with loans secured with property.
Lenders might also require a personal guarantee as an additional form of security.
In addition to secured business loans, you might also want to consider invoice finance (borrowing using your unpaid invoices as security) or asset finance (borrowing against assets on your balance sheet)
You can use almost anything as security to guarantee a business loan, as long as it has value. Commercial property is commonly used, and some lenders will accept personal residential property (or other personal assets) as security.
When lenders value a business’s security for a secured loan, they will look at how ‘encumbered’ the security is (i.e. do you own it 100% or are there other parties involved?). Lenders might in addition ask for a personal guarantee.
If you’re offering commercial property (or land) as security, and it has an existing mortgage, the lender may register a legal or equitable charge.
A legal charge is an actual legal interest in property (or land), rather like a right of way. It gives the lender the power of sale if you fail to keep up the loan repayments. However, the lender will require consent from your existing lender (for example, your mortgage provider) and this consent may not be forthcoming. It can take several weeks for the lender to register a legal charge – and this means you’ll have to wait for the funds.
You’ll get funds much faster (within hours of the loan being approved) if the lender registers an equitable charge over your property without the consent of your mortgage provider. Although the lender does not gain the power of sale over the property (though they could go to court and obtain an order for sale based on their equitable charge), they do gain enough security to approve your loan.
So the main difference between a legal charge and an equitable charge is power of sale.
As the name suggests, a cash-secured business loan is a loan using cash as security. Whilst this may seem odd to some business owners, on occasions businesses do wish to borrow using cash to secure a loan. These types of loans have different terms compared to loans secured with property or other assets.
Yes. If your business lacks assets, or if you don’t want to use your assets as security, you may be able to get an unsecured business loan. These loans are a simple, low-cost way to borrow.
Bear in mind, however, that if you’re after a large unsecured business loan, your business will need to have a strong cash flow position and long trading history that shows you can easily afford repayments and a balance sheet that shows there is value in the business. A secured loan might therefore be your best option in this case.
Yes. One of the advantages of a secured loan is that, from the lender’s perspective, your credit rating is less important than the assets you use to guarantee your borrowing. In other words, lenders take on less risk with a secured business loan than they would with an unsecured loan. This means that if your business has a bad credit history you’re more likely to be successful if you apply for a secured loan.
That said, you should be aware that:
Missing a loan payment or defaulting on a secured loan or an unsecured loan (defined as failing to pay back a loan within an agreed time-frame) can cause serious problems for your business.
Before you agree to a loan, you should check what the terms and conditions are for non-payment. If you miss a payment, you will most likely incur a fine, based on a percentage of your monthly instalments. You might also have to pay the administrative costs that your lender incurs in notifying you.
Your contract will specify what constitutes defaulting on your loan – it can be after several – or just one – missed monthly payments.
In the case of a secured loan, because the loan is secured against your assets, you run the risk of losing them if you fail to make the repayments as agreed with the lender. This won’t necessarily happen immediately – you’d need to check your loan contract. This is of course one of the key differences between a secured loan and an unsecured loan.
Your business credit score will certainly take a hit. This means you’ll find it more difficult to access finance in the future, including other business loans. It can also impact your future business dealings, since many companies carry out credit checks on companies they’re considering working with.
A poor credit score also means less favourable terms (for example, higher interest rates) on any loans or other types of finance you might apply for in the future, because you pose an increased risk to the lender.
While there are ways you can improve your business’s credit rating, negative information can stay on your company credit file for years.
If you’ve given a personal guarantee (i.e. you’ve offered personal assets such as your home as security) and your business then fails to make repayments, you become personally liable for paying off the debt.
Secured loans are usually cheaper (i.e. interest rates are lower) because there’s less risk for the lender. Lenders might also offer longer terms and larger amounts if a loan is secured by assets.
With unsecured lending, on the other hand, the lender takes on more risk, which makes unsecured loans more expensive (i.e. interest rates are higher).
The security reduces the risk for lenders, you can usually borrow more money and you’ll be offered better interest rates, in comparison to a secured loan.
If a loan is secured against a high-value asset, the lender has the reassurance that if things go wrong and you can’t keep up the repayments, they can take the asset to recoup their losses.
The lender is taking on less risk than they would with an unsecured loan, and this gives them more confidence to lend to your business.
It also means they are less likely to require a personal guarantee.
That said, in the case of a limited company or a limited liability partnership, lenders might also require a director’s personal guarantee as an additional form of security, especially if your credit history is less than perfect.
Bear in mind that if you’re the director offering a personal guarantee (i.e. offering personal assets such as your home as security) and your business then fails to make repayments, you become personally liable for paying off the debt. You should seek professional advice before you consider signing a personal guarantee.
You may have the choice of many different financing options if you’re unable to get a secured loan – or if you decide that a secured loan is not for you.
If you need funds quickly a secured loan might not be your best option. You might instead consider an unsecured loan, which can be more expensive in terms of interest but doesn’t require you to use assets as security.
If you’re looking for shorter-term borrowing, you might consider revolving credit facilities, business credit cards or a bank overdraft.
All Nigerian high street banks offer secured loans.
If you would like to discuss secured business loans get in touch to speak with our loans experts for a free, no-obligation discussion.
Written by
Alastair is South African and has a depth of experience in small business financing and strategy. He has led the launch and development of several successful ventures related to fintech, biotech and agriculture. Alastair studied economics and finance at the University of Cape Town, and then went on to complete his Masters at the University of Edinburgh.
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