How To Get A Secured Business Loan in 2021
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A secured business loan is a loan that requires some form of collateral. Collateral are assets the lender uses to secure repayment of the loan. In the event a company defaults on their loan, the lender has the right to seize the collateral to recoup their losses. Examples of collateral include real estate or equipment.
Unsecured loans, on the other hand, don’t require collateral. But because they’re riskier for the lender, unsecured loans typically have higher interest rates and shorter repayment terms than secured loans. Secured loans appeal to business owners because they’re easier to qualify for than unsecured loans and come with lower interest rates, bigger loan amounts and offer more flexibility.
How to secure a business loan
To secure a business loan, you must be able to offer up business or personal assets that can be converted into cash. Here are some examples of assets than can be used to secure a loan:
- Property: Business loans secured against property include personal real estate, as well as items like cars, boats or motorcycles.
- Equipment: Equipment you use to operate your business, such as machinery.
- Savings: Money in your savings account, checking account or a business loan secured with a certificate of deposit (CD).
- Inventory: Some lenders allow you to use the inventory you have in stock as collateral. This is usually between 60% and 80% of the value of the items.
- Invoices: With invoice factoring, borrowers can get an advance on their outstanding invoices. These invoices are then used as collateral to secure the loan.
- Investments: Stocks, bonds or mutual funds.
- Valuables: Valuables includes items like jewelry or collectors items.
- Blanket liens: A blanket lien allows the lender to sell any asset owned by the business to recoup their losses in the event of a default.
- Personal guaranty: Signing a personal guaranty means that if your business defaults on a loan, you’re personally responsible for repaying it through personal assets.
Unsecured vs. secured business loans
Secured loans require an asset as collateral while unsecured loans don’t. This leads to differences in the loan application process as well as the structure of each type of loan.
When you apply for an unsecured loan, the lender will more heavily weigh your credit score and repayment history than they would if you were applying for a secured loan. Because unsecured loans aren’t backed by anything, lenders will also typically offer less funding and shorter repayment terms. An unsecured loan may require a personal guaranty that puts the onus to repay the loan on you in the event the business defaults. A lender may also place a blanket lien on all your business assets, meaning the entirety of your business’ assets become collateral.
Still, an unsecured loan can be a good option if you have a strong credit score and need financing fast to capitalize on an opportunity. The application process is typically simpler for unsecured business loans because there’s no collateral to appraise, meaning you could have your funding in short order.
Advantages of secured business loans
Easier to qualify for: Offering collateral reduces the lender’s risk, which increases the likelihood that you’ll get funding. For business owners with bad credit, a secured business loan offers a path to financing and the opportunity to rebuild their credit score.
Better terms: The lower the lender’s risk, the better the terms you’re likely to get. If you have valuable collateral, it’s possible to get a large amount of financing with a long repayment term at a low interest rate.
Flexibility: For businesses just starting out, a secured loan provides you with the opportunity to put up personal assets as a way to cover startup costs.
Disadvantages of secured business loans
Loss of collateral: The risk with any secured business loan is losing the asset you used to collateralize the loan in the event of a default. This is a risk all business owners must weigh before deciding to take out a secured loan.
Time to funding: Because the lender has to appraise the value of your collateral, it can take a longer amount of time to receive funding from a secured loan than it otherwise would with an unsecured loan.
6 top options for secured business loans
SBA loans are secured loans from lenders that are backed by the U.S. Small Business Administration (SBA). You can apply for an SBA loan through an SBA-approved lender. The SBA offers a Lender Match tool where you can describe the type of financing you need and be matched with an SBA lender in your area.
The most common type of SBA loan is the SBA 7(a) loan. Depending on the type of SBA loan you get, your loan amount could range up to $5 million repaid over five to 25 years with interest rates starting at about 6%. To qualify for an SBA loan, you must prove that you’ve already exhausted your alternative financing options. SBA loans are typically collateralized by assets like real estate or business equipment.
Most banks and alternative lenders offer term loans. Short-term loans typically offer repayment terms between three to 18 months and loan amounts ranging from $5,000 to $500,000. Long-term loans may offer amounts into the millions and have repayment terms as long as 20+ years.
Eligibility requirements for a term loan vary by lender and loan amount, but most will look for a solid credit score, one to two years of operating history, strong revenue and cash flow. You can collateralize a term loan with business assets like real estate, equipment and vehicles.
Equipment loans are loans that use equipment (machinery, vehicles, etc.) as collateral. If you default on the loan, the lender will seize the equipment you purchased with the loan and sell it to recoup its losses.
There are a variety of online lenders that offer equipment loans. Loan amounts start at $5,000 and can go all the way up to $1 million. To qualify, you’ll need to meet your lender’s credit score, time in business and revenue requirements. Repayment terms typically last three to seven years.
Invoice factoring allows your business to access funds tied up in unpaid invoices by selling those invoices to a factoring company. The factoring company then advances a certain amount (usually 70% to 90%) of the unpaid invoices. When the invoice is paid, the factoring company takes a fee, then sends you what’s left.
With invoice factoring, the invoice serves as collateral for the loan. You can apply for invoice factoring with a variety of alternative lenders online. Loan amounts can go all the way up to $5 million. Loans are repaid as invoices are filled. Some factoring companies will charge a one-time flat fee per invoice, while others will charge a fee that increases based on the amount of time the invoice has gone unpaid. To qualify, you’ll need to meet the lender’s credit score, time-in-business and revenue requirements.
Business line of credit
A business line of credit allows you to borrow a predetermined amount set by a lender. The line of credit is revolving, which means that once you pay it off, you’ll be able to draw on those same funds again. Furthermore, you only pay interest on what you use (average APRs for business lines of credit can range from 8% to 80% or more).
Business lines of credit typically come with credit limits between $1,000 to $100,000 and are offered by both banks and online lenders. A secured business line of credit requires you to put up business assets as collateral, such as commercial real estate. To qualify, you’ll need a minimum credit score of at least 500 and six months to two years of business history on the books. You’ll also need to meet the specific lender’s revenue requirements.
Inventory financing allows you to use your current inventory to collateralize a loan. Many online lenders offer inventory financing, including BlueVine, OnDeck and Headway Capital. Inventory financing loan amounts range from $1,000 to up to $250,000. Most lenders will charge weekly or monthly interest rates.
To qualify, you’ll need a personal credit score of at least 550. Lenders will also want to see at least six months of business history on the books. Loan terms typically last three to 18 months.
Where to find secured business loans
If you’re looking for a secured business loan, three online lenders to look into are OnDeck, BlueVine and SmartBiz. Here’s the lowdown on each.
OnDeck offers short-term business loans that are secured by a general lien, meaning all your business assets are collateral for the loan. They also offer business lines of credit that can be secured by accounts receivables or inventory.
Short-term business loans from OnDeck come with loan amounts of $5,000 to $250,000 and repayment terms up to 18 months. Repayments are made on either a daily or weekly basis, and APRs start at 11.89%. Business lines of credit offer loan amounts of $6,000 to $100,000 with repayment terms up to 12 months and weekly payments.
To be eligible for an OnDeck secured loan, you must have been in business at least one year, have a FICO Score above 600 and $100,000 in annual business revenue.
With BlueVine secured invoice factoring, you can get up to a $5,000,000 advance on outstanding invoices. To qualify, you’ll need a FICO Score of at least 530, three months of business history and $10,000 in monthly revenue.
BlueVine will provide up to 90% of the outstanding invoice upfront with a fee as low as 0.25% per week. Once the invoice is paid, you’ll receive the remainder of the funds minus BlueVine’s fee. The invoice serves as collateral on the loan.
BlueVine offers a quick online application process and approvals in as little as 24 hours. You can then upload invoices to your BlueVine dashboard to receive funds.
SmartBiz is an online lender offering SBA 7(a) loans in addition to traditional term loans. For 7(a) loans, you can qualify for up to $5,000,000 in financing on 120– to 300-months repayment terms. Interest rates range from 4.75% to 7.00%.
You can apply online via the SmartBiz website and receive funding in as little as seven days. To qualify, you need to show at least $100,000 in annual business revenue and be cash flow positive. Also, you must have two years of business history on the books and a minimum credit score of 640.
SmartBiz requires business owners to personally guarantee the loan and will place a lien on your business assets.
Secured business loan FAQs
What is a secured business loan?
A secured business loan is a loan that requires some form of collateral. If the business defaults on the loan, the lender has a right to seize those assets as means of repayment.
How do secured business loans work?
Secured business loans offer financing based on the value of the assets you put up as collateral. The lender will appraise the value of your collateral and offer financing based on the value of the assets. Once you receive financing, you’ll repay it based on the prescribed terms of your loan agreement.
What counts as collateral for a business loan?
Lenders accept a variety of different assets as collateral. Common examples of collateral include commercial real estate, business equipment and machinery, inventory, invoices, blanket liens and personal guarantys.
Are secured loans easier to get?
Compared to unsecured loans, secured loans are typically easier to qualify for because they are backed by assets. This reduces risk for the lender, meaning they might be more willing to offer you financing even if you have bad credit or low monthly revenues.