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How To Get A Secured Business Loan in 2022
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Secured business loans use collateral to reduce the risk to lenders, which allows the borrower an opportunity for more lenient terms and credit score requirements. There are various ways to secure a loan, from property to using a personal guarantee. Compared to unsecured loans, secured business loans may be a better option for business owners with bad credit and startups.
What is a secured loan?
A secured loan uses some form of collateral to minimize the risk to a lender. The collateral is typically an asset that the lender can possess if you default on the loan. For small businesses, assets like equipment, savings and real estate will often serve as collateral, as well as a personal guarantee for secured business loans. Because the collateral acts as a guarantee of the loan, startups and businesses with bad credit may seek out secured business loans as a means of financing.
Secured vs. unsecured business loans
An unsecured business loan is financing that doesn’t require collateral to borrow. However, unsecured loans may still require a personal guarantee or blanket lien, which obligates the borrower to repay the loan.
Because of the role collateral plays, there’s a few more differences between secured and unsecured business loans:
|Secured business loan||Unsecured business loan|
|Loan Terms||Collateral can allow for longer repayment terms||Typically short terms due to increased risk for lender|
|Interest rate||Interest rates tend to be lower because of lowered risk||Typically higher interest rates because collateral mitigates the risk to lender|
|Credit score||Lenders may be more lenient on credit scores with the additional security of collateral||Lenders tend to have high credit score minimums without collateral|
Secured vs. unsecured: Which is right for my business?
Deciding between secured and unsecured business loans comes down to several factors: funding need, credit score, timing and willingness to put specific business assets as collateral.
A secured business loan can help you get more funding with a lower credit score, but an unsecured loan can be faster and doesn’t require a specific asset for collateral.
How to secure a business loan
There are several ways to secure a business loan:
- Property: Whether it’s your home, car or commercial real estate, you could put up your property as collateral for a loan. The challenge about this form of collateral is that the value is not certain, so your lender may require an appraisal.
- Personal guarantee: A personal guarantee requires the business owner to be personally responsible for the loan, even if they’re structured as a limited liability corporation. Unlike collateral, which is more specific, personal guarantees can be unlimited, meaning the borrower would have to pay back the full amount of the loan.
- Savings: Lenders see cash as the best collateral, as its value is more liquid.
- Inventory: Similar to property, inventory is a less tangible asset than cash savings and like other forms of property, inventory may require an appraisal to count as collateral.
- Equipment: Equipment is another form of property for collateral. There are equipment financing companies that use the equipment you want to purchase as collateral.
- Blanket liens: A blanket lien will collateralize all assets of a business. Lenders prefer this type of collateral because there are multiple assets to cover the loan amount.
Pros and cons of secured business loans
|Easier to qualify for: Collateral typically allows the lender to be more lenient about requirements.||Loss of collateral: You risk losing your collateral if you can't make payments.|
|More favorable terms: Lenders typically provide longer terms due to reduced risk.||Slower time to funding: Because lenders need the appraisal value of your collateral, the loan can take longer to fund.|
|Greater flexibility: Securing a loan can give you the flexibility of different financing options like equipment loans, invoice financing, business lines of credit and business term loans.||Additional fees: You may have to deal with origination fees of the amount financed.|
7 types of secured business loans and financing options
For business owners with good credit, SBA loans provide lower interest rates and funding up to $5 million through the 7(a) loan program. The U.S. Small Business Administration partners with lenders to make loans that can be used for purchasing equipment, real estate or working capital.
Amount: Up to $5 million
Variable: 7.75% to 10.25%
Fixed: 10.50% to 13.50%
Terms: Five to 10 years for equipment purchases; up to 25 years for working capital
Typical requirements: Collateral may be required for loans larger than $350,000
Rates accurate as of August 1, 2022.
Business term loans
You can cover a range of business needs with business term loans, from covering work capital gaps to financing growth and expansion. Both traditional banks and alternative lenders typically offer business term loans, but the main differences between the two types of lenders are the interest rates and eligibility requirements. Traditional banks may offer low rates with high eligibility requirements, while with online lenders it’s often the reverse — high interest rates and lower eligibility requirements.
Business term loans
Amount: Typically ranges from $5,000 to $600,000
Interest rate: Typically ranges from 2.5% to 71%
Terms: 3 months to 20 years
Typical requirements: Requirements may vary by lender, but common eligibility standards include at least a 550 credit score, about two years in business and certain annual revenue minimums
You can use equipment loans to finance business equipment, including commercial vehicles, large printing machines and heavy equipment like bulldozers. Equipment loans use the equipment you plan to purchase as collateral. They are typically fast to fund and may require a down payment of up to 20%.
Amount: Typically ranges from $5,000 to $1 million
Interest rate: Typically ranges from 2% to 20%
Terms: Typically ranges from 1 to 25 years
Typical requirements: At least 6 months in business and a 575 minimum credit score, plus a 20% downpayment
With invoice financing, your invoices act as collateral for a line of credit, based on your company’s average invoice volume. Businesses can choose to draw on the line of credit when they need additional cash to meet expenses. You’ll typically need strong credit and cash flow to qualify.
Amount: Up to 90% advance on your unpaid invoices (up to $5 million)
Interest rate: 1% to 3% factor fee
Terms: Typically 30 to 90 days
Typical requirements: Typically requires a minimum annual revenue of $100,000, 3 months in business and a 530 credit score
Business line of credit
New businesses may want to consider a secured business line of credit, which is used similarly to a business credit card. You’re only obligated to repay the amount you use plus interest. Business lines of credit can be a useful financing option if you want the flexibility to take as little or as much as you need. They also help new businesses cover unexpected finance needs without making multiple credit inquiries or over borrowing.
Business line of credit
Amount: Up to $10 million
Interest rate: Typically ranges from 0.25% to 35.90%
Terms: Typically 6 to 18 months
Typical requirements: May require at least 6 months in business, a credit score of 600 and monthly revenue of $10,000
You may improve your capital by using your inventory as collateral with inventory financing. Inventory loans are typically short term loans with terms from six months to two years that are used to cover seasonal fluctuations and cash flow gaps. You’ll typically need strong credit and have to deal with higher interest rates than alternative options.
Amount: Up to $250,000
Interest rate: Monthly rates from 0.25% to 4.80%
Terms: Up to 24 months
Typical requirements: At least 550 credit score, 6 months in business and $10,000 minimum monthly revenue
Where to get secured business loans
Bank of America: Secured business line of credit
As a traditional bank, Bank of America may offer secured business lines of credit with interest rates starting at 6.00%. The Business Advantage secured line of credit has a $25,000 minimum credit amount. While interest rates are low, you’re required to pay at least $150 in upfront and renewal fees.
Startups would need to look elsewhere, as this bank has a minimum of two years in business and at least $250,000 in annual revenue to qualify for its secured line of credit.
National Funding: Equipment loans
For equipment financing, National Funding has loans up to $150,000 and terms from 24 to 60 months. Businesses with bad credit may be eligible for an equipment loan since the minimum credit score requirement is 575. On the downside, you may need to look elsewhere to cover equipment purchases over $150,000.
Funding Circle: Secured business term loans
For large loan amounts and fast funding, Funding Circle has business terms loans from $25,000 to $500,000 that may fund in as few as three business days. There is no loan application and term lengths range from 6 to 84 months.
As an online lender, Funding Circle has less strict requirements compared to traditional banks, but the trade-off is higher interest rates.
Secured business loans FAQs
Are secured loans easier to get?
Compared to unsecured loans, secured loans may be easier to get because the required collateral reduces the risk to the lender.
Are there secured business loans for startups?
Yes, there are online lenders, including National Funding, that offer secured loans for businesses that are less than a year old.
Are there secured business loans for bad credit?
Yes, there are secure loans for businesses with credit score requirements as low as 575.