Providing security for business loans

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Providing security for business loans

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Why should you read this guide?

At some point you may need to borrow money from a bank for your business. Nowadays banks will always ask for security for any business borrowing and it is important to know and understand what this means. The security is in place to help the bank get their money back if you cannot pay. This guide will explain the main forms of security to you. Independent legal advice is always recommended before providing security to a bank or other lender.

Background

There are many ways that a bank can take security from a business and some of the most common are discussed below. The issue arises around how much security to give to a bank and often the lender and borrower differ on this. Like everything else with a bank, security is negotiable to a point. At all times it is recommended to get legal advice before signing bank security documentation as it could save problems at a later date.

Guarantees

A personal guarantee may be asked for if you are a director of your own company. This essentially means that if the company cannot repay the debt the bank will come after you for the money. Depending on the size of the loan this may be an "unsupported" guarantee which means you are simply writing a promise to repay the money. For larger loans this guarantee may be backed by personal assets. If you do not have sufficient assets a third party guarantee may be suggested. This means you would need to ask someone you know to act as a guarantor for you. You can negotiate here if you feel the company has sufficient assets to provide for security and the bank does not need yours.

Cash backed

At some points there may be a good financial reason for you to borrow money from a bank even though you have the cash yourself. The bank likes deals like that as they are safer and they get to charge you for essentially borrowing your own money. You will be asked to put the cash in an account that they will block to stop you withdrawing it until the debt is repaid. You can negotiate a lower interest rate as they can offset the credit interest you should accrue.

Bond and floating charges

These are taken over the general assets of the company - usually covering plant and machinery, stock and other fixtures and fittings. This is a loose form of security which allows for the company to trade i.e. to sell stock and replace it. The charge does not cover assets which have been provided as security for other specific loans e.g. vans covered by hire purchase agreements.

Debenture/standard security

This is essentially the same form of security known as a Standard Security in Scotland and covers land and buildings. The bank will ask for a valuation to be carried out on the asset and will write this down depending on what the asset is. For personal property they will usually lend up to around 75% of the value and for commercial property usually around 60%. Although the banks do like this type of security they will take a close look at their chances of resale before agreeing a final loan to value.

Summary

You do have a lot of options for providing security and it is important to make sure that you are doing this for the right reasons. If you are unable to pay the borrowing you have taken, the bank will realise the security to get their money back. Once again, always take legal advice before entering into a security contract.

Further information

If you need to discuss security, have a chat with your solicitor or accountant in the first instance. Each bank will also be able to tell you information on each type of security they require.