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Secured Business Loans

A secured loan, also known as a collateralized loan, is best suited for entrepreneurs and small business owners who have collateral to back their loan.

What is a secured business loan?

Secured business loans require business owners to supply collateral to receive funds. If the borrower does not pay back the loan, the lender can claim the asset or collateral. Common forms of collateral for business loans include real estate, inventory, accounts receivable, and equipment.

Why consider a secured small business loan?

There are many reasons to consider a secured small business loan, but they are not the only option when you require. You can also consider obtaining an unsecured business loan, which would not require you to provide the lender with any type of asset as security.

Here are some of the circumstances under which a business owner might choose a secured business loan vs. an unsecured loan:

  • You have a newer business or a lower credit score. Secured loans may be easier to qualify for since you're providing the lender with collateral.
  • You're hoping to save money on interest. Lenders may be willing to offer a lower interest rate for a business loan with collateral, which could save you money over the repayment term.
  • You need a larger loan. You may be able to secure additional funding with a secured small business loan, depending on the value of your collateral.
  • You have good cashflow. Failing to repay a secured small business loan can result in the loss of your collateral. However, that may not be a concern if you have steady cash flow and don't have any budgeting concerns.

A lender may also allow for an extended repayment period with a secured business loan. Keep in mind, however, that taking longer to pay off the loan could result in paying more interest.

Types of secured business loans

There are a few types of secured loans, including equipment loans, factoring, and merchant cash advances, that have their own unique features. Prior to deciding which secured small business loan is the best fit for you, consider the information below on each loan type.

Equipment loans

Equipment loans come in handy when you're looking to purchase, upgrade, improve upon, or replace the equipment you use to keep your business operating efficiently. The collateral you pledge to get an equipment loan is usually the new piece of equipment you are buying. The process to get an equipment loan is similar to getting a car loan.

Merchant cash advance

Merchant cash advances, or business cash advances, provide upfront working capital, allowing your business to make important investments quickly. Merchant cash advances are repaid directly from future sales.

This type of small business funding is ideal if you prefer paying back your advance when your business makes sales instead of paying on a set schedule. However, the downside is that merchant cash advances typically have higher fees than other types of small business loans.

Business factoring

Factoring is a unique way to access small business funds, as it enables you to obtain working capital by selling your receivables. Factoring is the sale of an asset, not a business loan, and is helpful when businesses face long receivables.

This form of small business financing is appealing to entrepreneurs and small business owners who don't want to wait for their customers' payments.

SBA loans

SBA loans are made available through an arrangement between the Small Business Administration (SBA) and certain commercial lenders. There are several types of SBA loans, such as 7(a) loans and export-assistance loans. SBA loans often require collateral, but the SBA will not turn down borrowers for insufficient collateral alone.

Secured Business Loan FAQs

What do you need to qualify for a secured loan?

Every lender has its own requirements for a small business loan that you'll need to meet to qualify for funding, including:

  • Minimum credit score requirements. Lenders use credit scores as a guide for gauging the likelihood of your business repaying its financial obligations. The minimum score range lenders accept for secured business loans can range from 620 to 700-plus.
  • Time in business requirements. You may need to have a minimum of one-to- two years in business to qualify for a secured small business loan, although it's possible to find lenders that work with newer startups.
  • Annual revenue requirements. Lenders will also consider annual revenues as a determining factor. For example, you may need to have a minimum of $250,000 in annual revenue to qualify.

Perhaps most importantly, you'll need to have sufficient collateral to secure the loan. Your lender may specify the type of collateral it's willing to accept as a condition of securing small business funding. Keep in mind that certain types of collateral, such as real estate, may require a professional appraisal to determine its value.

How much collateral is needed for a secured business loan?

The amount of collateral that's required for a secured small business loan will depend on the amount of funding you're seeking. A common rule of thumb is that the value of the collateral you're offering should be equivalent to the amount of the loan. For example, if you need $250,000 in financing, you'd need to provide $250,000 worth of collateral.

Secured vs. unsecured business loan: What's the difference?

The primary difference between secured loans and unsecured loans is the collateral requirement. When you obtain small business loans without collateral, the lender does not expect you to offer any assets as security.

You may, however, be required to sign a personal guarantee for the loan. A personal guarantee means that you can be held personally liable for the debt should you default. Personal guarantees are common with unsecured business loans. You may also need to sign one to obtain an unsecured business credit card.

In addition to the collateral requirement, secured and unsecured business loans may have these differences:

  • Secured business loans may be easier to qualify for, regardless of credit score, time in business, or revenue requirements.
  • Unsecured loans may carry higher interest rates or charge additional fees, compared with secured loans.
  • It may be possible to get a longer loan term or borrow a larger amount of money with a secured business loan.

Secured small business loans can help you to satisfy a range of funding needs for your business. If you have collateral to offer, you may consider choosing a secured loan.

Equipment Loan
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Merchant Cash
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