Best Secured Business Loans

Best Secured Business Loans - Features Comparisons

Now that you’ve taken an in-depth look at the various funding options that are available to you, here is a side-by-side comparison of their eligibility criteria and interest rates. Use this information to help you decide which secured loan company is right for you.

What Is a Secured Business Loan?

A secured business loan is a type of borrowing in which one or more of your business assets is used as collateral. If you fail to keep up with payments, the lender may seize this collateral to cover the cost.

Typically, lenders will accept the following assets as collateral: commercial property, inventory and stock, large pieces of equipment and machinery, vehicles, and unpaid invoices. Interest rates on secured loans tend to be lower than other borrowing arrangements, but they present a greater risk to the borrower.

Traditional lenders, like brick-and-mortar banks, prefer this type of borrowing. There’s also a host of alternative, online platforms that provide secured debt arrangements.

Secured Vs. Unsecured Business Loan: What’s the Difference?

• Risk - Secured loans will require you to put down one or more of your business assets as collateral. Should you fail to keep up with the payments, the lender may seize those assets to cover the cost. This makes this type of lending a little riskier for businesses; so, you should make sure you’re confident of keeping up the payments. On the other hand, unsecured loans are much less risky. You don’t need to post any collateral; so, none of your business assets will be at risk.
• Interest rates - Rates generally tend to be much lower for secured loans than unsecured ones. This is attributable to the collateral associated with the former. It greatly reduces the risk of lending, thereby enabling creditors to offer lower rates.
• Borrowing limits - the collateral associated with secured loans usually makes the limits significantly higher compared to unsecured loans. Because you’re borrowing against the value of a specific asset, the lender can offer greater financing flexibility. In some circumstances, the loan amount can be quite high. For example, if you post a fleet of vehicles, an expensive piece of machinery, or an expansive stock inventory, your borrowing limit could easily reach hundreds of thousands of dollars.
• Term limits - This is another area where secured loans come out on top. You might find terms as long as 10 or 25 years with a secured loan, while unsecured options tend to hover at around five-year limits.

Types of Secured Business Loans

• Mortgage - A mortgage loan is the most recognizable type of secured loan. Like a residential home loan, it entails the pledging of real estate property. For businesses, the property pledged is a commercial real estate asset.
• Equipment financing - With this type of arrangement, the borrower purchases a specific piece of equipment and simultaneously pledges it as collateral. Lenders will usually provide between 80% and 100% of the total value of the asset being purchased.
• Term loan - A term loan is a traditional type of fixed-rate borrowing that entails a fair amount of flexibility regarding collateral. The specific assignment of collateral usually involves a conversation with your chosen platform, after you’ve reviewed a number of offers and homed in on the optimal solution.
• SBA 7(a) loans - Small Business Administration (SBA) loans are guaranteed by the federal government, usually, on an unsecured basis. However, those borrowing more than $350,000 must provide some form of collateral. Options can vary across the SBA program; so, we recommend doing your research in this space.

What Kind of Collateral Can You Use to Secure a Business Loan?

• Inventory - This is a popular choice for predominantly product-based businesses, such as e-commerce stores and retail outlets that carry large amounts of stock. Bear in mind, you’ll need inventory with long shelf lives to qualify for funding.
• Property - This is a very common source of collateral, but quite risky in the event of default. Failure to keep up with payments could have a significant impact on your business.
• Equipment - Another popular choice for businesses is the pledging of equipment. This route is most often taken when purchasing equipment, vehicles, and/or specialized machinery. It is probably one of the easier types of funding to secure, given the transparent and easily verifiable nature of the purchased asset.
• Invoices - Many businesses have long turnaround times on invoices and might not receive payment for work until months after completion. Lenders can accelerate the cash flow by providing funding, as long as you are willing to pledge the invoices as collateral.
• Blanket lien - This is a common arrangement for borrowers with poor credit. A blanket lien gives the lender full discretion to use any of your business assets to cover your debt in the event of default.

How to Get a Secured Business Loan?

Step one - Do your research

Make sure your chosen lender will accept the type of collateral you’re offering. Some will ask for specific items of equipment or inventory, while others will provide a blanket lien. You should understand what’s at risk before you apply. It might also be worthwhile to perform a valuation of your assets beforehand.

Step two - Start submitting applications

Most alternative lenders will let you submit an application without facing a hard pull to your credit rating. This is a great way to assess your financing potential.. We recommend trying a few loan marketplaces to help increase your chances of finding an optimal solution.

Step three - review eligibility criteria

Each lender has distinct criteria you’ll need to meet before you can apply. A few fairly common criteria include your credit rating, the length of time you’ve been in business, and your monthly income. All criteria should be made clear before you apply.

Step four - Gather your documentation

Once you’ve chosen a lender and the type of secured loan you’d like, it’s time to prepare your documentation. Most secured loans will require, at a minimum, the following items: proof of identity, evidence of your monthly income, and evidence of ownership of any asset being used as collateral.

In addition, many lenders will ask for both your personal and business tax returns for the previous few years.

Secured Business Loans Pros and Cons

Secured Business Loan Pros

• Low-interest rates - Since lenders are almost guaranteed to recover the money being loaned, either through the receipt of regular payments or seizure of collateralized assets, credit risk is low. As a result, lending rates tend to be relatively low.
• High funding limits – When taking out a secured loan, the limit can be quite high relative to an unsecured arrangement. This is especially true if you have a particularly valuable asset to use as collateral.
• Easier to obtain - If you’re already in possession of a high-value asset, oftentimes, it can be used as proof of previous business acumen. Moreover, if pledged as collateral, it can facilitate a loan approval.

Long repayment terms - Since lenders have a good idea of the lifetime of any assets pledged, this can often result in generous repayment terms, often up to 25 years.

Secured Business Loan Cons

• Higher risk - Borrowers should always be aware that any asset they pledge as collateral could potentially be seized in the event of default. Make sure the collateral you pledge isn’t critical to your business.
• You must have an established business - It’s very rare for startups to be able to access secured funding, simply because they haven’t been around long enough to accumulate a pool of marketable assets. This usually translates to relatively high-interest rates for newbies.

Final Thoughts

While secured business loans do require that an asset be used as collateral to secure the funding, they also have their advantages. Often, choosing a secured loan can help you access a better interest rate or more lenient qualifying requirements. If you’re interested in accessing this type of loan for your business, use this list of lenders to help you get started finding the right match for you.