Loan providers – How to protect your investment

As a loan provider or lender, we understand that you want to protect your investment from irresponsible borrowing or unforeseen repayment issues.

How you do this depends on the type of loan you have provided to a particular borrower. We’re here to help you understand your options and how you can protect your investment and relationships with your clients.

Secured vs unsecured loans

The risk to you as the lender will depend on the type of loan provided.

A secured loan is one for which the borrower puts its assets up as collateral to secure a higher loan amount.

If a business does not have high-value assets or does not wish to put them at risk, they may take out an unsecured loan for a lower amount.

Protections for an unsecured loan

Unsecured loans do not have collateral backing and may carry a higher risk for lenders, but they don’t have to spell disaster.

To protect unsecured loans you have provided, you may be able to:

• Conduct comprehensive credit checks to assess the borrower’s creditworthiness and repayment history
• Set higher interest rates compared to secured loans to compensate for the increased risk
• Offer shorter repayment terms, which can help reduce the risk of default over time

Unsecured loans should be explicitly discussed and agreed upon in writing to avoid confusion later on.

For example, it could cause a major dispute if you seek to recover costs for non-payment against a borrower’s assets and they are unaware that you can do this.

Protecting a secured loan

If you have provided a secured loan to a business, your protections will depend on what assets are owned by the borrower.

Depending on what assets the borrower owns, you could secure your loan by obtaining:

• Legal charges – A security based in property; it allows lenders to recoup money based on property that they own.
• Debentures – Security based on the credit history and reliability of the borrower, not secured by any collateral.
• Personal guarantees – An individual or director agrees to repay the debt loaned to their company if the company lacks the funds for repayment.
• Corporate guarantee – A corporate entity agrees to assume the borrower’s debt, separate from the director or group which may have taken out the loan on its behalf.
• Fixed charges – Including over other valuable assets of the borrower such as intellectual property or valuable equipment.

The costs associated with the security will depend on the security sought but can vary from £500 to £1,500 (plus VAT and disbursements) each.

For advice on security against loans, please contact our Banking and Finance team today.