Secured Business Loans: What are They and Should You Get One?

Applying for a business loan is a common step taken by entrepreneurs to obtain the financing they need to grow their small businesses, expand their services or inventory, and pay for their day-to-day operations during the initial stages of their venture.

While a loan can serve as a critical tool for establishing or strengthening your business, all lenders have specific requirements for their borrowers. Many banks and other financial institutions will need you to secure the loan as one of the conditions for receiving funds.

In this article, you’ll learn how to secure a business loan, what the difference is between an unsecured and a secured loan, whether you can use cash to secure a loan, and more.

 

What is a secured business loan?

This is a standard loan for small businesses that requires the borrower to offer up assets that have value (collateral) in order for the loan to be approved. The collateral essentially serves as an insurance policy for the lender. In the event that you fail to pay back the loan, the lender can cover their losses by seizing your collateral. 

Standard forms of collateral accepted by lenders include real estate associated with the business or a business vehicle. A loan which includes collateral on the borrower’s end is considered a secured loan.

The value of the collateral you need to offer will depend on several factors, all based around potential risk to the bank. If you have an excellent business credit score and request a relatively small amount of money, the value of your collateral will be lower. 

The loan-to-value ratio, better known as LTV, indicates what percentage of the loan must be covered by your collateral. If you have shaky or little credit history and request a large sum, then your LTV could be 100%. That would mean you need to provide collateral worth 100% of the loan’s value in order to secure it.

It’s important to remember that in certain cases, like a market downturn where the value of your assets suddenly plummet, you could theoretically be required to put up additional collateral towards the loan in the future.

 

Unsecured vs. secured business loans

An unsecured loan refers to a loan that doesn’t require collateral. However, that doesn’t mean that there are no strings attached! If a lender is willing to grant you an unsecured loan – in other words, a loan that doesn’t need to be secured by traditional collateral – you will need to provide other guarantees so that the lender has recourse in the event you default.

Oftentimes, a lender will require you to sign a personal guarantee, which means that they can go after your personal assets, like your private bank account, house, or car, should you cease paying back the business loan. 

Another option a lender might provide for you is to agree to a Uniform Commercial Code (UCC) lien in the event of nonpayment. Under the terms of a UCC lien, the lender can seize your business assets in order to recoup their losses, and they will receive priority over other debtors if your business declares bankruptcy. 

Unsecured loans do pose a greater risk to the bank or financial institutions, so they typically will have less favorable conditions for the borrower. That could mean higher interest rates or a shorter time period in which the loan can be paid back, compared to a conventional, secured small business loan.

 

Secured business loans and bad credit

Securing a business loan when you have bad credit is challenging, but it is possible. One of the first steps you can take to increase the likelihood of being approved is waiting a few months to improve your business credit score. 

Think about taking simple steps, like making sure to pay your vendors and suppliers punctually and consistently, and using less than the maximum amount of available credit on your business credit card each month. These small changes can make a difference, and while they won’t fix your credit score overnight, they can demonstrate a pattern of fiscal responsibility that matters to lenders.

If you need to apply for a business loan and don’t have the ability to wait, the chances are that the amount of collateral requested by the lender will be quite high due to your poor credit. You might even end up in a scenario in which the bank requires a LTV of 100 – meaning that you’ll need to provide assets worth the entirety of the loan amount in order to secure the financing.

You should also expect to encounter less favorable conditions, like high interest rates and a relatively short period of time in which you can pay back the loan. Carefully review the conditions of the loan before accepting, and you may want to shop around before committing so that you can get a better understanding of the most favorable loan terms for your business.

Some pre-qualification tools can help you better understand your chances of being approved for a business loan and gain a rough estimate of the potential conditions a lender will offer you. You can easily check if you qualify for an option like the Revenued Business Card here. 

 

What is a cash secured business loan?

Also called savings loans or passbook loans, this type of secured business loan sees the borrower commit a cash guarantee in exchange for the loan. In this scenario, the borrower agrees to use the cash in their bank accounts as collateral. If the borrower defaults on their loan, the lender can liquidate the borrower’s banked cash to cover the remainder of the debt.

Cash secured business loans are one of the loans most preferred by lenders. The reason? It’s low risk. Should you stop your monthly payments, they can immediately move in and seize your cash. Other assets, like houses and vehicles, come with lengthy complications, such as holding a public auction. Non-cash collateral can take lenders months or even years to liquidate, whereas cash can be swiftly obtained.

 

How to get a secured business loan

In order to be approved for a secured business loan, you’ll need to take the following steps:

 

  • Determine which type of loan is best for your business. With SBA loans, equipment and inventory financing, and conventional small business loans all options for your business, look into which one is the right fit for your needs.
  • Research lenders and gauge market conditions. Different banks and financial institutions will offer different interest rates and payback times. If the market is tight and interest rates are high, you might consider waiting a few months (if possible) until conditions are more favorable.
  • Ensure that your business credit score is good and all of your paperwork is in order. Gather all your documentation, including a one-pager that outlines your business plan, cash flow, Tax ID, number of employees, and other pertinent information.
  • Secure your collateral. Decide which of your business or personal assets you’re willing to offer as collateral for your loan. Whether it’s cash, real estate, a vehicle, or another asset of value, you should be prepared for a scenario in which your collateral is expected to cover most – or even all – of the loan amount.
  • Submit your application and wait patiently. For example, if you’ve applied for an SBA loan, the approval process typically takes around 30 to 90 days, from the time your application is submitted to when you’re approved and receive funding. Waiting times will vary based on the lender.

 

If your application for a business loan is rejected, don’t worry! Statistics show that roughly half of all small business loans in the US aren’t approved. You still have options when it comes to securing financing for your business. Consider looking into invoice financing, which allows you to offer lenders to collect on future payments from customers as a form of collateral. 

A business line of credit might also be a viable alternative to a traditional loan. Many financial institutions offer business lines of credit, which essentially function like a business credit card with a set maximum limit.

Businesses are not obligated to pay back anything more than what they’ve spent, plus interest. This flexible form of financing is ideal for businesses that aren’t sure how much funding they’ll need in the future, and want the freedom of being able to borrow on a rolling, non-static basis.

Most major banks offer a business line of credit as one of their services. Most terms range from 6 to 18 months. Interest rates and the credit limit are dependent upon the borrowing business’ credit score and market conditions.  

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