What Are Secured Business Loans and How Do They Work?
What Are Secured Business Loans and How Do They Work?
Secured business loans, also known as collateralized loans, are a type of small business loan that is backed by a personal guarantee or a valued asset. If you don’t pay back your business loan, the lender can legally reclaim their losses by using collateralized assets or a personal guarantee.
In the end, secured business loans will provide you with a better loan offer—lower interest rates and longer periods. In some ways, you’re providing the lender with reassurance—they’ll receive their money back one way or another.
Is a secured loan appropriate for your business? We’re here to assist you in finding out.
We’ll go over everything you need to know about secured business loans in this article, including how they work, what sorts of secured loans are available, and how to apply for the best ones.
What Are Secured Business Loans and How Do They Work?
As previously stated, secured business loans require some form of collateral (i.e., whatever your business has that can be converted to cash) in order to be approved.
Although secured loans can take numerous forms, as we’ll see below, they’re usually structured as business term loans. In this situation, you obtain a lump sum of capital from a lender and repay it over a predetermined length of time, with interest.
However, when it comes down to it, the majority of business loans are secured in some form.
After all, lending to small businesses is a dangerous activity from the lender’s standpoint, especially when working with startups or businesses with bad credit.
Secured loans, on the other hand, reduce some of this risk by granting the lender the ability to seize and liquidate certain assets (the collateral used to secure the loan) if you fail.
Business Loans: Secured vs. Unsecured
With this knowledge, you might be wondering what the difference is between secured and unsecured loans.
In other words, unsecured business loans do not need you to put up collateral in order to obtain funding.
However, the phrase “unsecured” can be deceptive in this context. Although unsecured loans do not require you to provide collateral or physical assets, the lender will limit their risk by seeking a personal guarantee or obtaining a UCC-lien on your business.
Furthermore, unsecured loans frequently have higher interest rates than secured business loans, owing to the fact that secured loans provide the lender with more security, allowing them to offer you funds at cheaper rates.
Learn more about unsecured business loans with our guide.
How to Get a Business Loan in 7 Easy Steps
As previously said, collateral (in some form) is essential for secured business loans because it reduces the lender’s risk and makes them more inclined to provide the funds you require.
So, how do you go about getting a business loan? Here are seven possibilities:
- PROPERTY – When applying for a secured business loan, you may be required to put up real estate assets or home equity as collateral. Borrowers most commonly employ this form of collateral.
When you put your house or real estate holdings up as collateral for a business loan, you’re giving the lender authority to seize these assets if you default.
Property, on the other hand, doesn’t really relate to physical properties. Equipment, vehicles, motorcycles, boats, and other items can also be used as collateral on a business loan.
These secured business loans, also known as “cash-secured loans” or “passbook loans,” use the cash in your bank as collateral for the loan.
If you default on your loan, your lender may be able to seize your savings account to recuperate their losses.
Furthermore, from the standpoint of a lender, this is one of the best sorts of collateral. After all, it’s a low-risk situation for them—if you default on your business loan, they’ll get their money back right away.
They also won’t have to deal with the difficulty of selling a real item like a house, equipment, or a car.
Many small business owners have customers who do not pay their invoices on time, causing cash flow problems.
Those unpaid bills represent income for your business in this situation, and they can also be used as collateral for loans.
Through a procedure known as invoice financing, many lenders agree to take collateral based on unpaid bills.
You can use your inventory as collateral for a loan if you require business funding to buy inventory.
Similar to invoice finance, inventory financing uses your inventory as collateral in case you can’t sell your products and end up defaulting on the loan.
Although equipment can be used to secure a loan as a sort of property, it can also be used to secure a loan in a different way.
If you’re trying to finance the acquisition of new or used equipment, you can use the equipment as collateral on the loan, just like you can with invoice and inventory financing.
- BLANKET LIENS
A lien, unlike the other types of collateral we’ve discussed thus far, is a legal claim linked to a business loan that allows the lender to seize and sell the business’s assets in the event of failure.
A blanket lien, as the name implies, is the most extensive lien—and the best for the lender. Blanket liens allow lenders to seize whatever asset or form of collateral a business holds in order to recoup their losses.
Having said that, while a blanket lien may be utilized as an additional security measure on a loan backed by physical collateral, it’s also routinely used by lenders to lessen the risk of an otherwise unsecured business loan.
- PERSONAL GUARANTEE
A personal guarantee, like a blanket lien, is a sort of security mechanism used to support a loan.
To sum it up, a personal guarantee is an arrangement between you and your lender that puts your personal assets on the line, thereby making you a co-signer on the loan.
As a result, if your business fails on the loan and is unable to repay it, you are personally liable for repayment.
Creditors can seize your personal assets, such as your home, investment accounts, and other valuables, as repayment.
Personal guarantees, like blanket liens, are frequently utilized to “secure” business loans that aren’t backed by tangible assets.
You may also be needed to put up collateral and sign a personal guarantee, depending on the lender and the type of loan.
The Different Types of Secured Business Loans
Let’s look at the many sorts of secured business loan choices now that you know what can be utilized to secure a loan.
Let’s be clear: practically all business loans are secured in some form. As a result, reading over your business loan agreement before signing and completing the closing process is even more important.
Even if you are not required to provide collateral, the lender may place a lien on your business or need a personal guarantee for the loan.
With that in mind, below are some of the most prevalent types of secured business loans.
Traditional Term Loans
Traditional term loans, also known as medium-term loans, are the most frequent secured small business loans, as we briefly described above.
Although traditional term loans are available from online lenders, you should first apply with a bank to get the best rates and terms.
If you apply for this type of loan through a bank, you will almost certainly be asked to provide collateral to secure the loan. The type and amount of collateral you’ll require depends on the bank you’re working with, your credit score, and the amount of financing you’re seeking.
However, you should be prepared to submit your real estate holdings, vehicles, equipment, savings, and other assets as collateral for these secured business loans in the majority of circumstances.
Fast Facts on Term Loans
Do you believe a standard term loan is the best secured business loan for you?
The following are some quick facts about various types of company loans:
Amounts of Term Loans
- Traditional term loans typically range in size from $25,000 to $500,000.
Term Loan Conditions
- Traditional term loans typically have maturities ranging from one to five years, though this varies by lender.
Rates on Long-Term Loans
- Traditional term loans are a cost-effective borrowing option, with interest rates ranging from roughly 5% to 25%.
Learn more about business term loans with our guide.
SBA loans are yet another excellent secured business lending alternative. The Small Business Administration (SBA) offers term loans through three of its most popular loan programs: 7(a) loans, CDC/504 loans, and microloans.
SBA loans aren’t actually issued by the SBA, despite their name. Instead, they’re issued by lending partners like banks and credit unions and are partially insured by the SBA.
Lenders are encouraged to assist small businesses because the SBA acts as a guarantor of these loans. It’s a win-win situation for both the business owner and the lender in the end. Because lenders are willing to take on less risk, you may be able to obtain a larger and less expensive business loan than you would otherwise be eligible for.
However, like other term loans, every SBA loan will require some form of collateral, whether it’s actual assets or a personal guarantee from an SBA lender.
Quick Facts on SBA Loans
SBA loans are one of the most popular financing options for small business owners.
Here are some quick facts about Small Business Administration loans.
- The 7(a) loan program, which is the most popular SBA lending program, allows for loan sums of up to $5 million.
- An SBA loan can range from five to 25 years in length, depending on the loan program you’re working with.
- Although your rate is negotiated between you and your SBA lender, depending on whatever loan program you choose, you may expect an interest rate of from 4% to 13%.
In our guide, you’ll learn more about the various SBA loan programs and how they work.
BUSINESS LINES OF CREDIT
When evaluating different types of secured business loans, business lines of credit should be considered as a financing alternative.
A line of credit is similar to a business credit card in that it provides you with access to a pool of funds from which you can draw whenever you need or desire. You’ll only pay interest on the money you use, and your line of credit will be refilled to its original amount once you’ve paid back the lender.
When it comes to credit lines, you can choose between unsecured and secured options. Alternative lenders can provide unsecured business lines of credit up to $100,000; however, the APRs on these products are quite high.
Secured business lines of credit, on the other hand, enable borrowers with lower income and credit ratings to obtain bigger loan limits at cheaper interest rates. Lines of credit can be excellent secured business loans for startups in this way.
Fast Facts about Business Lines of Credit
A business line of credit can be a good alternative if you need flexible funding with a secured business loan.
Here are some quick facts:
- Credit lines might be anything from $10,000 to $1 million.
- They Don’t have “terms,” they do have payback schedules that are established once you draw on the line. This timeline will vary depending on your credit line lender, but a business line of credit repayment period typically ranges from six months to five years.
- With a business line of credit, you only pay interest on the money you take out of it. Depending on your eligibility, these rates can run anywhere from 7% to 25%.
Learn more about secured business lines of credit with our guide.
If you’re seeking for capital to buy equipment, as we discussed earlier, you can check into equipment financing.
Equipment financing is a sort of self-securing business loan in which the loan is secured by the equipment itself. Because equipment financing is self-collateralizing, businesses that don’t have other types of collateral to offer can still get the money they need.
Furthermore, equipment finance providers are frequently eager to engage with newer businesses and business owners with poor credit. In this approach, one of the greatest types of secured business loans for bad credit and startups is equipment financing.
Fast Facts on Equipment Financing
Overall, equipment loans are short-term secured business loans that work similarly to a consumer car loan.
Here’s what you should be aware of:
- The loan amount is determined by the type of equipment, its price, and whether it is new or old, although it can be up to 100% of the equipment’s value.
- Equipment loans usually have terms that last for the expected lifetime of the equipment. As a result, the terms are often five or six years long.
- Interest rates range from 4% to 40%, with rates on the higher end of the spectrum more likely for startups and businesses with bad credit.
Learn more about equipment finance with our guide.
Invoice financing (also known as accounts receivable financing) is a sort of self-securing funding similar to equipment financing that is appropriate for businesses who do not have additional collateral to offer.
You don’t have to put up any of your personal assets as collateral for an invoice financing loan because your outstanding invoices act as collateral.
Furthermore, because invoice financing providers typically consider your customers’ payment history in addition to more traditional qualifications, this form of borrowing can be significantly easier to obtain—making it a wonderful alternative for businesses with less-qualified credit.
Fast Facts about Invoice Financing
Invoice financing addresses a typical and frustrating problem for small business owners: you’re waiting for customers to pay your outstanding invoices, and your cash flow is suffering as a result.
Here are some quick facts:
- Typically, invoice financing companies will advance up to 85% of the amount of your outstanding bills, with the remaining 15% held in reserve.
- Invoice financing, like a business line of credit, does not have traditional “terms.” Instead, the timing of receiving the remaining 15% held in reserve by the financing company is determined by when your customers pay their invoices.
- A 3% processing fee and a 1% “factor fee” for each week it takes your customers to pay their invoices will normally be deducted from the 15% held in reserve by the lender. After your customers pay, you’ll receive the remaining 15%, minus costs.
Learn more about invoice financing with our guide.
Finally, inventory financing is one of the last sorts of secured business loans. Inventory financing, like invoice and equipment financing, is a self-securing loan.
However, inventory financing can come in a variety of forms, including a medium-term loan, a line of credit, or a short-term loan, but they all serve the same purpose: you’re given money to buy inventory.
Then, of course, you repay the lender over time, plus interest, using the inventory as collateral for the loan.
Inventory financing is a good option for entrepreneurs that don’t want to risk their personal assets. But there’s a catch: if you can’t sell your inventory for enough money to pay off your loan, the lender isn’t likely to be able to either. As a result, lenders may be unwilling to provide these collateralized inventory-based secured business loans.
As previously stated, inventory financing can take numerous forms. What you should know about this form of secured business loan is as follows:
You might not always be able to acquire a loan that is equal to the total liquidation value of your inventory, just like you might not be able to get a loan that is equal to the total liquidation value of your commercial real estate. Instead, a lender can provide you 50% to 80% of the value of the inventory.
You’ll find a variety of term lengths because inventory financing can take many different forms. However, because the goal is to sell the inventory you buy as soon as possible, a period of more than three years is unusual.
Interest rates vary widely depending on the type of financing, the lender, and, of course, the qualities of your business. In general, rates will likely range from 8% to 10%. Higher rates are more likely to be seen for short-term, quicker products. Higher rates are also more likely to be faced by newer businesses and those with bad credit.
Learn more about inventory financing with our guide.
Best Secured Business Loan Lenders
When it comes down to it, a few financing choices, such as merchant cash advances, don’t require any form of guarantee or collateral. Although unsecured business loans such as these exist, you must weigh the benefits and drawbacks.
Lenders will charge high interest rates on unsecured business loans since they don’t know if they’ll be able to reclaim their money if you default.
Even if you’re scared to put your assets on the line, being a responsible borrower—only taking on debt you think you can handle, paying on time and in full, and communicating with your lender about any issues—is the greatest way to protect yourself from losing them.
As a result, here are some top lenders to consider if you’re seeking the best secured loan for your business.
- WELLS FARGO
The best option for bank lending.
Wells Fargo is one of the most small-business-friendly banks available.
Business lines of credit, SBA loans, and commercial real estate financing are all available through Wells Fargo.
Get more information on Wells Fargo business financing.
- ONDECK CAPITAL
Short-term loans and lines of credit work well.
OnDeck, an online lender, is a popular choice for both short-term loans and lines of credit.
Their loan amounts range from $5,000 to $500,000, with a maximum period of three years. You’ll be able to borrow up to $100,000 with a one-year term on lines of credit.
To be eligible for OnDeck funding, you must meet the following criteria:
- A minimum of $100,000 in annual sales
- At least one year of experience in the field
- OnDeck can approve applications as soon as the same day if you have a personal FICO score of at least 600.
These short-term secured business loans, on the other hand, will have higher interest rates than bank loans or other longer-term options. Typically, the rates vary from 9.99% to 99%.
- BLUE VINE
Invoice financing is the best option.
BlueVine is a leading lender to consider if you need invoice financing.
Depending on the size of your unpaid invoices, this funding option with BlueVine can go up to $5 million.
BlueVine will provide you 85% to 90% of the amount of your invoice up front, and the rest when your customer pays it.
BlueVine accepts applications from businesses that have been in operation for at least three months, have a personal credit score of 530 or higher, and have annual revenues of $100,000 or more.
Frequently Asked Questions
- Is it easier to receive a secured business loan?
In general, secured loans are easier to obtain because providing sufficient collateral on a loan increases your chances of being authorized by a lender. After all, the more collateral you can provide, the lower the risk for the lender to give money to your business.
Secured loans are also significantly easier to obtain for businesses with bad credit or no track record. In fact, these businesses will find it exceedingly difficult to obtain cash without securing their loan in some way.
Learn more about the simplest business loans in our guide.
- What is the average time it takes to acquire a secured business loan?
The time it takes to acquire a secured business loan and get funds is highly dependent on the type of loan and the lender.
Secured business loans from online, alternative lenders will be the quickest in general, with some lenders funding in as little as one day. SBA and bank loans, on the other hand, will take much longer to finance, ranging from a week to several months.
To that end, if you want to speed up the loan procedure, you should supply all essential information—including collateral details—up front, as well as promptly and completely answer any extra inquiries from the lender.
- What does it indicate when a loan is secured by all of a business’s assets?
A loan secured with all business assets is exactly what it sounds like: you’ve utilized all of your business’s assets to secure financing.
Most lenders, on the other hand, will not demand you to put up all of your physical business assets to secure a loan, hence this phrase may be more correctly used to loans secured by a blanket lien (or even a personal guarantee).
By issuing a lender a blanket lien, you are giving them the legal ability to seize all of your business’s assets in order to recuperate their losses if you default on the loan.
- As a startup, can I acquire a secured business loan?
Secured business loans are available to startups in a variety of forms. In fact, a business will find it far easier to obtain funding through a secured loan rather than an unsecured loan.
To this point, self-securing business loans—equipment financing, inventory financing, and inventory financing—are particularly attractive to startups who lack the physical assets or money to use as collateral for other loan products.
Learn more about no-collateral startup business loans with our guide.
- Is it possible to acquire a secured business loan if I have bad credit?
Yes, secured business loans are available to businesses with bad credit. If your business has bad credit, though, your loan alternatives may be limited, and you’ll almost certainly pay higher interest rates than businesses with good credit.
Businesses with bad credit, on the other hand, will find it difficult to obtain unsecured business loans, as lenders will want to limit their risk by requiring some form (or numerous forms) of collateral.
Businesses with bad credit, like newer businesses, may resort to self-secured business loans as their first choice, as the self-collateralizing nature of these products makes them easier to qualify for.
Learn more about the best bad credit business loans with our guide.
At the end of the day, if you’re searching for funding, you’ll almost certainly be evaluating your secured business loan choices.
While an SBA or traditional term loan is the best option because of the long periods and low interest rates, they can be slow to finance and difficult to qualify for.
As a result, businesses in need of quick cash, as well as startups and those with bad credit, should choose lines of credit or self-securing financing, such as invoicing, inventory, and equipment financing.
Finally, keep in mind that the best secured loan for your business is not only one that you qualify for, but one that you can truly afford.
To this point, before agreeing to any form of financing, make sure you understand the exact cost of the debt and that you’ll be able to stick to the payment schedule—that way, you won’t lose any of the collateral you’ve put up.
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