Lenders are more likely to offer attractive interest rates and longer terms if the loan is secured on a business asset
Secured Bank Lending
Security for bank lending is generally provided in the form of property or fixed assets such as machinery, equipment and vehicles, but could also incorporate the outstanding value of a sales ledger.
Being able to access favourable loan terms often depends on the value of the asset(s) secured, in addition to the risk as perceived by the lender. Clearly, higher risk industries will attract less favourable interest rates and fees, but businesses benefit from continued use of the fixed asset in question, with no restrictions.
Care needs to be taken when offering security for a bank loan, however. Attention to the risks and consequences of possible default should be fully considered prior to taking up secured bank lending, and also to ensure that the best terms available are obtained.
Lenders are more likely to offer attractive interest rates and longer terms if the loan is secured on a valuable business asset, and less likely to request personal guarantees from directors.
Unsecured Bank Lending
Cash flow lending
Projected cash flow figures are used as the basis for this type of lending, which is generally used for funding acquisitions or other long-term growth plans. The lender focuses on various calculations MBOs such as meritable profit margins, EBITDA, and total interest ratios before establishing whether the applicant company is a suitable prospect. If successful, the lender offers a term loan with fixed or variable interest rates.
Profitable companies with a strong credit rating are likely to be more attractive to banks, further reducing their risks and providing a solid base for financing.
In summary, secured bank lending and unsecured cash flow lending both offer access to cash lump sums that enable a company to use for its strategic plans. These might include expansion into new market or improving production facilities, acquisitions, MBOs, equity release.