If you have physical assets, you might consider putting them up as collateral to secure your
small-business loan
. Providing collateral reduces risk for the lender, which can help increase your chances of approval, as well as help you access the most competitive interest rates and repayment terms.
Here’s what you need to know about secured business loans and how to get one.
What is a secured business loan?
A secured business loan is backed by some
form of collateral
, usually tangible business assets, like inventory, property or equipment. If you fail to repay and your business loan goes into default, the lender can claim the collateral to recover its losses.
How to secure a business loan
You can secure a business loan in different ways, using any or several of the following:
-
🏠 Property.
This can include business and personal assets, such as real estate, office equipment, manufacturing equipment, vehicles or your home. -
🚜 Equipment.
Equipment you already own can be used as collateral. However, you can also get self-securing financing, in which the equipment you’re looking to buy serves as collateral. This is known as
equipment financing
. -
🛍️ Inventory.
Similar to equipment, inventory can be used to secure a loan in two ways. You can use existing inventory as collateral, or you can get
inventory financing
, in which you use a loan to buy new inventory and that inventory then serves as collateral on the loan. -
🧾 Invoices.
You can use your outstanding customer invoices as collateral to get a cash advance from a lender. Also known as
invoice factoring
, lenders advance you a percentage of your unpaid invoice, and when your customer pays the invoice, you receive the remaining percentage minus the lender’s fees. -
💵 Savings.
You can use the cash in your bank account to secure a business loan. Some lenders may prefer cash because it’s the most liquid type of collateral. -
🤝 Personal guarantee.
A
personal guarantee
is a legal agreement that holds you personally responsible for your business’s debt and allows the lender to claim your personal assets to cover the debt if your business can’t pay. Sometimes, adding a second person to guarantee the loan, or a
business cosigner
, can also serve as a way to secure a business loan. -
🏛️ Uniform Commercial Code lien.
A
UCC lien
gives a lender the right to seize your business’s assets if you can’t repay your loan. A UCC lien is an official document, typically filed with the applicable secretary of state’s office after you’ve signed your loan agreement. Lenders may file a UCC lien on specific business assets such as equipment, or they’ll file a blanket lien, which covers all assets.
It’s important to note that some secured business loans are backed by physical assets as well as personal guarantees and/or UCC liens.
Types of secured business loans
Any
type of business loan
can be secured if backed with physical collateral. Here are some common types of loans, however, that may require collateral:
SBA loans
SBA loans
are issued by banks and credit unions and partially guaranteed by the U.S. Small Business Administration. These loans offer
low interest rates
and long repayment terms, and can be used for a wide variety of purposes.
SBA 7(a) loans
are the most popular type of SBA loan, and typically require collateral for financing amounts over $50,000
.
SBA 504 loans
can only be used to finance large, fixed-asset purchases. For these loans, the property or equipment you’re purchasing serves as collateral. Both 7(a) and 504 loans require a personal guarantee.
Business term loans
A
business term loan
is a lump sum of capital that you borrow from a lender and repay over a specific period of time, with interest.
While some online lenders offer secured term loans, you are more likely to find these options from banks and credit unions. Secured term loans generally come with longer repayment terms and lower interest rates compared to unsecured loans. Business lines of credit and equipment financing are other types of secured loans that may offer larger credit limits and lower interest rates. Commercial real estate loans are also secured by the property being purchased or renovated, but may require multiple years in business and strong credit to qualify. The pros and cons of secured business loans may vary depending on the lender and your overall qualifications. Secured loans may offer lower interest rates and longer repayment terms compared to unsecured loans, but the risk of losing collateral if you fail to repay is a significant downside. Additionally, secured loans can take longer to fund, especially if the lender requires an appraisal of your collateral.
To secure a business loan, you should first determine your funding needs and evaluate your qualifications. It’s important to understand the requirements of different lenders, as well as the value of the collateral you plan to use. Comparing different lenders, such as banks, credit unions, and online lenders, can help you find the best option for your needs. Banks and credit unions typically offer competitive rates but have stricter qualifications, while online lenders may be more flexible but could have higher interest rates. Secured loans are a form of financing that requires collateral to secure the loan. This collateral can be in the form of physical assets such as property or equipment. By pledging collateral, you can potentially access better interest rates and terms on your loan. However, it’s important to note that loans from online lenders are typically more expensive than those from traditional lenders, even with collateral. It’s always a good idea to compare different lenders and their terms before making a decision. Secured business loans offer a viable solution for those seeking cost-effective, long-term financing. These loans require collateral, such as a physical asset like a vehicle, real estate, cash on hand, UCC lien, or personal guarantee, that the lender can reclaim in case of default.
Major banks like Bank of America, Chase, Wells Fargo, and PNC Bank, as well as regional and local banks, provide secured business loans. This type of financing is accessible to businesses of all sizes and industries.
When considering collateral for a business loan, assets that can be easily liquidated are preferred. Cash, savings accounts, and certificates of deposit are among the top choices for collateral, as they can be quickly converted into funds in case of non-payment.
Overall, secured business loans offer a practical and reliable option for businesses looking for stable and affordable financing to support their growth and expansion. Please rewrite the following sentence to make it easier to understand:
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