A fundamental truth in the world of business is that there are times when it really is necessary to spend some money in order to make some money. Enterprises of all types need loans for all sorts of reasons. Perhaps there is a need to replace old equipment, bring in additional hires, accumulate inventory or simply expand operations in general. Secured business loans provide an accessible method of facilitating growth, but can do so without unnecessarily high-interest rates. These loan products are ideal for capital-heavy entities and those needing to purchase an asset for income generating purposes.
A wide range of business loans exists in the market today, with some of them designated as secured loan products. This simply means that the loan is backed by some sort of firm collateral. Thus, a borrower pledges an existing asset as a way of guaranteeing repayment. The existence of collateral creates a lower degree of risk for lenders. This means that in the event of a default on the loan, the lender is free to sell or utilize the asset to recoup the loss. An enterprise that lacks collateral or wishes to avoid pledging it to a lender may prefer to seek an unsecured loan instead.
Loans that are secured by collateral are routinely available through conventional financial institutions including regional and national banks, and numerous credit unions also offer them. With collateral involved, lenders have the flexibility to provide lengthier loan terms and lower rates of interest that might otherwise have been possible with unsecured loans.
In essence, collateral is an asset that the business already owns and is subsequently pledged to a lender in order to guarantee repayment of a loan. This is a critical element in business loans because it provides reassurance for lenders. Should a borrower default, the financial institution will be able to recover at least some of the funds they advanced.
A broad array of assets can be used as collateral in a business loan relationship. Depending on the type of business involved, possible examples of collateral include:
It is quite common for borrowers to use property to secure business loans. Real estate, including equity in a residential property, can certainly be utilized in this context. Lots of other sorts of property can also serve as collateral, including vehicles, heavy equipment, boats and the like.
A common explanation for why a business might seek a loan is because they need help in managing their current cash flow situation. This can happen because an unexpected number of customers fail to promptly pay their invoices. Fortunately, it is possible to use those late accounts as a form of collateral, because they are likely to eventually represent business income that will be received. Lenders regularly accept this type of collateral as security for loans, referring to the arrangement as invoice financing.
In essence, a lien is a claim that is placed on an asset as a way to secure payment of a debt. Blanket liens encompass all assets a business has in its name. Therefore, a lender who receives such a lien will have the ability to take and sell any collateral that falls into this category if a default on a business loan occurs.
For a number of smaller enterprises, the fate of a business ultimately has a great deal to do with the financial health of the person who leads it. Therefore, it is not uncommon for a lender to look into the owner’s personal credit record or ask for a personal guarantee before making a loan.
Personal guarantees are promises from a business executive or owner that a loan will be repaid. Should a business find itself unable to pay back a loan, the personal guarantor will be responsible for the debt. Failing to make good on a personal guarantee for a business loan can damage a guarantor’s own credit standing.
In order to ascertain which type of loan product makes the most sense for a given business, it is necessary to review things such as credit record, turnover history, the age of the enterprise, loan amount requested and the reason for the request.
The primary distinction between secured vs. unsecured loans is that a secured product will require a pledge of collateral, while an unsecured doesn’t require such a pledge.
As such, a secured loan can often be obtained at a lower rate of interest, in larger amounts and with longer loan terms than an unsecured product. Of course, applications may take more time to process, given the need to review information about collateral.
An unsecured loan will likely come with a shorter repayment term. Thus, the approval time on this type of loan will probably be shorter as well. This can be an important factor for a business in need of quick access to funds. However, you may also find that the interest rate will be higher.
In order to learn more about the benefits and possible drawbacks of each type of loan, it is worthwhile to take a look at our comprehensive loans page.
A secured business loan is something used by businesses of all descriptions, though there are some entities that can benefit more than others, such as:
It must be kept in mind that with a secured business loan, an enterprise is basically allowing a lender to take and sell the pledged collateral if a default occurs.
Further, it is important to shop around and compare in order to get the most advantageous loan terms. Though conventional banks regularly offer secured loans, there may also be alternative sources able to provide shorter loan periods and appealing interest rates.
Once the loan application has been completed, collateral assessed and loan approved, the lender will put an offer on the table. However, if the terms simply do not fit the needs of a business, they need not be accepted.
There are times when a secured business loan is not the right choice for a given enterprise. Just because such loans are made with great frequency, that does not mean they fit every situation. Make certain that the differences between secured and unsecured products are fully understood before moving forward.
Those considering a secured business loan must also prepare themselves for the process to take a fairly substantial amount of time. Due to stricter lending rules and collateral requirements of these products, it may take some time before approval is granted.
Gaining as much advance knowledge as possible about different business loan products is the best way to ensure that the most sensible option is selected.
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