How To Get Secured Business Loans
Secured business loans are loans that require a form of collateral, such as real estate or a piece of equipment. In the event that a company defaults on its loan, the lender has the right to seize the collateral and sell it to recoup any balances owed.
Secured loans are considered less risky, as companies are more conscious of making their payments on time to keep the assets they put up safe. This type of small business loan also tends to have better interest rates and terms than unsecured loans, which don’t come with any guarantees of repayment.
9 ways to secure a business loan
Lenders vary in which types of collateral they are willing to accept; however, the general rule is that the asset must be able to be converted into cash to be considered collateral for a secured business loan. This includes both the business’s assets, as well as the business owner’s personal assets. Use one of the following nine ways to secure your next loan:
- Property. In addition to any business or personal pieces of real estate, lenders might also accept such property as motorcycles, cars and boats.
- Equipment. If the equipment you use to operate your business has value, you can use it as collateral.
- Savings. Use the cash in your savings account, checking account, CD or mutual fund to secure a loan.
- Inventory. Borrowers may be able to get an advance on any inventory they have in stock that is ready to be sold. This is usually between 60 and 80 percent of the value of the items. The inventory itself is the collateral.
- Invoices. Just like with inventory financing, invoice factoring offers borrowers an advance on their outstanding invoices. The invoices are used as collateral.
- Investments. Companies that have stocks, bonds or mutual funds can use them to secure a business loan.
- Valuables. Some lenders are willing to approve certain valuables, such as collectibles or precious metals, as collateral.
- Blanket liens. A blanket lien is a type of collateral that allows a lender to sell any asset owned by the business when the loan is in default.
- Personal guarantee. A personal guarantee is another way to secure a loan. The individual making the guarantee is agreeing to assume liability and repay the debt if the business defaults.
Loans secured with a personal guarantee
The U.S. Small Business Administration (SBA) is a federal agency that secures business loans for other lenders. The SBA makes sure the borrower meets certain eligibility requirements, like being located in the United States and having an owner that has invested his or her own time and money. Once the business is approved, the SBA guarantees the loan.
Financial institutions benefit from partnering with the SBA, as the loan risk is shared between the two parties. It is important to note that borrowers will be required to follow the lending guidelines set forth by the SBA, as well as those of the bank or alternative lender they get the loan from.
Unsecured vs. secured business loans
Unlike secured loans, unsecured business loans do not require any form of collateral. Instead of looking at the business’s assets, the lender examines the company’s credit score and payment history to determine if they are eligible for an unsecured loan. For example, Guidant Financial requires borrowers to have a minimum credit score of 690 and a credit utilization below 50 percent to qualify for its unsecured loan.
Before you opt to take out a secured business loan, you’ll want to look at the advantages and disadvantages associated with it.
Advantages of secured business loans
- Easier to qualify for. Having collateral reduces risk to the lender, which means borrowers will find it easier to qualify for a secured loan than an unsecured loan.
- Lower interest rates. Because the loan is less risky, lenders are able to offer better interest rates.
- More flexibility. Businesses that are just starting out and don’t have a great deal of collateral have the flexibility of using the owner’s personal assets instead.
Disadvantages of secured business loans
- Longer time to approval. Secured business loans often times require collateral to be appraised, which takes time. Unsecured loans, especially those offered by alternative lenders, can be approved and funded in as little as 24 hours, which makes them the better choice for businesses that need cash fast.
- Risk of losing collateral. If a business defaults on its secured loan, its collateral can be seized and sold to cover the debt. If there is still a balance after the sale of the asset, the lender can seek payment from the business for the remaining amount.
6 best options for secured business loans
One of the SBA’s eligibility requirements is not being able to obtain funds from any other financial lender. That makes this type of loan an excellent choice for businesses who don’t qualify for a traditional business loan. Borrowers can use the SBA’s Lender Match to quickly fill out a survey that describes their needs.
Within two days, the organization will match them with lenders. Businesses can then compare the lender offers and select the one that best meets their needs. Applications and supplemental documents will need to be completed with the lender, not the SBA, to finalize the loan.
Short-term loans typically have terms between three and 12 months, while long-term loans span the course of several years. Because of this, businesses that need a little extra cash flow to cover seasonal inventory or payroll would do better with a short-term loan, while companies looking to expand their business over time would be best suited for a long-term loan. If you’re working with a bank, like PNC, you might need to become a member before you can apply for a loan.
You might be able to apply online or in person if the facility is nearby. You’ll need to collect the following information to fill out the application: details about the business, details about the business owners, information about the collateral and the amount of money you are requesting.
Equipment financing and leasing is strictly for businesses who are looking to purchase or upgrade their current equipment, but don’t want their working capital tied up. The equipment itself acts as the collateral, which makes the loan easier to qualify for. The best part is, the loan qualifies for the Section 179 tax deduction.
Banks and online lenders often have different application requirements; however, you can expect to provide information about your business and how long its been in operation, information about the equipment with a quote from the vendor and either a borrowing reference or a decent credit score.
Check out our top picks for the best equipment financing companies here.
As with equipment financing, your company’s invoices act as collateral when you utilize invoice factoring. This is an excellent option for businesses that have invoices with future due dates but would benefit from having the funds now. It’s also great for companies that don’t have the best credit scores, as the lender looks at the strength of the customers instead. The lender purchases the invoices from the business by giving them a percentage of the billed amount upfront.
BlueVine, for example, provides 85 to 90 percent. Once the invoice is collected, the lender takes out their fee and returns any overages to the business. A few of the things you need to apply include your company’s information and profit margins, the health of your client’s credit, invoices free of liens and no personal bankruptcies.
Business line of credit
A business line of credit is a type of revolving loan where the lender approves the business for a set amount of funding. The lender can then withdraw money from that loan in any amount at any time during the loan’s term. Some lines of credit are automatically renewed each year. Bank of America requires either a CD or blanket lien as collateral, while Wells Fargo only accepts a savings or CD account from its bank as collateral.
This loan is a good idea for companies that need to rebuild their credit, as well as businesses that require support for their ongoing operational expenses. To apply gather information about your business and its annual revenue, facts about the owner, including their Social Security number, and details about the collateral you intend to use.
Inventory financing uses the company’s inventory as collateral the same way invoice factoring uses invoices as collateral. If you need a little extra capital to cover temporary business expenses, this secured loan may be your answer. It is important to keep in mind that while this type of secured loan is easier to get than conventional financing, it is a bit more expensive.
To apply you’ll need to have reliable financial statements, have inventory that is marketable, utilize an inventory management system and report on any current debt. You might also be asked to share information on your officers, shareholders and members.
The bottom line
A secured business loan is an excellent financial tool for companies that don’t have the best credit scores, but need funding to grow or meet day-to-day operations. Not only are secured business loans easier to qualify for due to the reduced risk they carry, but they also tend to have better interest rates. There are even a variety of loan options to choose, so you can find the best deal for your business.