Second charge business loans: how they work and who theyʼre for

Since the year 2000, UK commercial property has risen in value by 3.2% per year. There have been blips of course – notably the Covid-19 years – and future growth is never guaranteed. But if youʼve already got a mortgage on your commercial property, your buildingʼs price rise could be the key to unlocking growth for your business.

A second charge loan lets you borrow against the equity youʼve built up without disturbing your existing mortgage deal. This can be particularly useful if you got your current commercial mortgage deal on favourable terms that you want to stick to or would prefer to avoid facing the early repayment charges that come with remortgaging. As interest rates on commercial mortgages are influenced by the Bank of Englandʼs base rate, theyʼve increased substantially since 2022. 

The amount you can borrow with second charge business loans is significant, typically starting from £25,000 upwards but the interest rates are higher than standard mortgages due to the additional risk lenders are taking. In this article weʼll explain how these loans work and look at the costs, benefits and practical realities of having two loans secured against the same property.

Key points:

• Second charge business loans let you borrow some of the equity your buildingʼs increased value has given you without remortgaging

• Substantial sums are available but interest rates are higher than standard commercial mortgages

• Funding Options by Tide can help when optimisation of working capital isnʼt enough, offering access to business finance up to £20 million

What is a second charge business loan?

A second charge business loan is a loan secured against property you already have a mortgage on. That mortgage is the first charge and this further loan is the second charge. If things went wrong and the property needed to be sold, your first mortgage lender would get paid first, and the second charge lender would get whatever's left.

With second charge loans you can access the equity you've built up in your business premises without having to remortgage. That means avoiding early repayment charges on your existing mortgage and keeping a deal that's already working well for you. It's particularly useful when you need substantial capital – typically £25,000 upwards – for things like major equipment purchases, business expansion, or buying out a partner.

As they're second in line to get paid, second charge lenders take on more risk, which is reflected in higher interest rates – usually between 6% and 15%. You'll also need to factor in arrangement fees, valuation costs, and legal expenses that can add a few thousand pounds to the overall cost.

Who are second charge business loans for?

Second charge loans work well when you need a significant sum of money but remortgaging would cost you more than you'd gain, or when your circumstances make remortgaging difficult. They're particularly suited to business owners who've locked in favorable mortgage terms they don't want to give up, or those who need to move quickly on an opportunity without the lengthy remortgage process.

Common use cases include:

• Business expansion and development: An injection of capital to open new locations or scale up operations when you've spotted ways your business can grow.

• Major equipment purchases: Paying for substantial machinery or technology that will enable  your business to produce more or improve efficiency, such as manufacturing equipment or specialist tools.

• Property improvements and repairs: Paying for essential repairs, renovations, or upgrades to your business premises or investment properties that will improve their value or use.

• Stock and inventory: Building up inventory levels ahead of busy periods or securing stock at favorable bulk-buy prices when the opportunity arises.

• Working capital and cash flow: Providing a funding boost to smooth out seasonal income fluctuations or bridge gaps while waiting for customer payments to come through.

• Debt consolidation: Rolling multiple business debts with different interest rates into a single loan to simplify your finances and potentially reduce your overall monthly payments.

• Buying out business partners: Acquiring a partner's share of the business when they want to exit, keeping control without having to remortgage the entire property.

It's worth noting that you'll need decent equity in your property – typically lenders want to see at least 25-30% equity remaining after both loans are in place. A second charge lender might also be more flexible if your recent accounts weren't brilliant due to business investment, or if you've taken on additional borrowing elsewhere that affects your remortgage options.

How do second charge loans work?

The process is relatively straightforward, though it does require some patience and paperwork:

• Application and assessment: You'll need to provide details about your existing mortgage, property value, business finances, and what you're using the funds for. Lenders typically want to see at least 25-30% equity remaining after both loans.

• Property valuation: The lender arranges an independent valuation of your property to confirm the current market value and calculate the equity available.

• Legal work: Solicitors handle the required legal registration of the second charge and let your first mortgage lender know about the second charge (though their permission isn't required).

• Approval and funds: Once everything's in order, the second charge is registered against your property and funds are released. The whole process typically takes 4-8 weeks from application to money in your account.

• Repayment: You'll make separate monthly repayments to both your original mortgage lender and your second charge lender, usually over terms of 3-25 years depending on what you've agreed.

Using second charge loans to fund business growth

Hereʼs an example of how this might work in practice. Letʼs say you bought your workshop five years ago for £400,000 with a £300,000 mortgage. Youʼve been steadily paying that down and now owe £260,000, while the property itself has increased in value to £500,000. That means youʼre sitting on £240,000 of equity – the difference between what itʼs worth and what you owe.

Now imagine youʼve identified an opportunity to acquire a competitorʼs client list and key equipment for £100,000, which would immediately increase your turnover by around 40%. Remortgaging your entire property would trigger early repayment charges of perhaps £8,000 on your existing mortgage, plus youʼd lose the favorable low fixed rate you secured three years ago. A second charge loan lets you borrow the £100,000 you need against your property equity without touching your original mortgage at all.

After taking out the second charge loan, youʼd have your original £260,000 mortgage plus the new £100,000 loan, totaling £360,000 in borrowing against a £500,000 property. That leaves you with 28% equity, which is comfortably above the threshold most lenders require. Youʼve funded significant business growth using the value youʼve built up in your property, kept your great mortgage rate intact, and avoided thousands in unnecessary fees. The higher interest rate on the second charge loan might cost you an extra £2,000-3,000 per year compared to mortgage rates however, so youʼll have to consider if that seems like a reasonable price to pay for accessing that capital when presented with this kind of opportunity.

Find business finance with Funding Options by Tide

Whether youʼre looking for a standard business loan, a short-term business loan, or something a little more specialist, like auction finance for property developers, weʼre one of the leading names in business finance in the UK, having helped facilitate over £1 billion in finance to more than 20,000 customers.

Checking if youʼre eligible is free, only takes a few minutes, and while a full application would impact your personal or business credit score, checking eligibility wonʼt. Just submit your details via the link below to find out if you could be eligible to borrow up to £20 million.

Find business finance.

FAQs

How quickly can I get a second charge business loan?

Typically between 4-8 weeks from application to having funds in your account, which is faster than remortgaging but still requires property valuation, legal work, and credit checks. Some specialist lenders can move things along in 3-4 weeks if your finances are straightforward and paperwork is ready.

What documents do I need to apply for a second charge loan? 

You'll need to provide proof of ID, recent business accounts or tax returns (usually the last 2-3 years), bank statements, details of your existing mortgage, and information about what you're using the funds for. Lenders will also need a current property valuation, which they'll arrange themselves.

Who can apply for a second charge business loan? 

Any business owner with commercial or residential property that has sufficient equity can apply, whether you're a sole trader, partnership, or limited company. Lenders typically want to see an established trading history (usually at least 2 years) and evidence that you can afford the repayments alongside your existing mortgage.

Do I need to tell my first mortgage lender before applying? 

You don't need their permission to apply, but your second charge lender will inform them once your application is approved as part of the legal process. It's worth checking your existing mortgage terms to ensure there are no restrictions on additional secured borrowing, though this is rare with commercial mortgages.

What fees are involved in getting a second charge loan? 

Beyond the interest rate, expect to pay arrangement fees (typically 1-2% of the loan amount), valuation costs (£500-1,500 depending on property value), legal fees for both your solicitor and the lender's (£1,000-2,000 combined), and potentially a broker fee if you're using one. These costs can add £2,000-5,000 or more to the overall expense.

What happens if I can't keep up with repayments? 

If you're struggling with repayments, speak to your lender straight away as they can offer options like payment holidays or restructured terms. Missing payments damages your credit rating and could put your property at risk, with the first mortgage lender being paid before the second charge lender if the property had to be sold.

Can I get a second charge loan on a residential property for business purposes? 

Generally yes, though some lenders will secure a business loan against your home if you have a clear business plan and evidence of how the funds will be used. The interest might not be as tax-efficient as with commercial property, and you're putting your home on the line, so proper financial advice is worth getting.

Can I use a second charge loan to consolidate business debts? 

Yes. If you have multiple business debts with varying interest rates, a second charge loan can roll them into a single monthly payment, potentially at a lower overall rate. Just make sure the total interest and fees you'll pay over the loan term work out cheaper than keeping your existing debts separate.

Can I pay off a second charge loan early? 

You can, though many second charge loans include early repayment charges that might be 5% in year one and decrease over time. Always check the early repayment terms before signing, especially if there's any chance you might refinance or sell the property.

What's the difference between a second charge loan and remortgaging? 

Remortgaging means replacing your entire existing mortgage with a new, larger one, while a second charge loan sits alongside your existing mortgage without disturbing it. Remortgaging might get you a better overall interest rate, but you'll pay early repayment charges and lose any favorable terms.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

Itʼs important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicantsʼ circumstances and creditworthiness. Funding Options will receive a commission or finderʼs fee for effecting such finance introductions.