What is a Secured Business Loan?
A secured business loan is when the borrower pledges an asset (such as a plant, equipment, stocks or vehicles) against the debt. If the debt is not repaid, the lender may claim the secured asset. Secured business loans can be used for a wide range of purposes, including working capital, expansion capital, asset purchase and more. The collateral is the most important aspect of secured business loans because it reduces the risk for the lending company, therefore reducing the interest rate that the borrower pays.
Banks and finance houses lend money and make their money by charging interest. An unsecured loan is riskier for a lender and therefore attracts higher interest rates than a secured loan.
Even with a poor credit rating, banks are more likely to lend money with a secured loan and often lower the APR (annual percentage rate) to a small business borrower who has collateral to secure a loan. It is quite the opposite with an unsecured loan.
What Sort of Business Might Use a Secured Business Loan?
The difficulty that owners have is making the right choice between a secured or unsecured loan.
A secured business loan is an excellent solution for those with a poor credit rating. It is a great option if you want to start a new business or expand your business. If your secured business loan is approved, you will have a lower APR rate and very likely a longer repayment period. This can make it affordable for start-up businesses to get the cash they need during a time when profits are just starting to grow.
Unsecured loans appear more attractive, but although they are often approved quickly, there is a bigger cost involved. Unsecured mean that there is no collateral offered, thus making it a risky business for the lender. Therefore, banks are obliged to charge higher interest rates, and some of them get the most out of it by charging exorbitant interest to reduce the risk on their capital.
Getting a Secured Business Loan
Lenders realize the needs of a small business and often approve a secured business loan giving a longer repayment period and a lower APR. They know that it is better to get their money back rather than foreclose due to financial difficulties caused by high-interest rates and short repayment period.
As a start-up, having a good business plan with a secure cash flow, will generate income and allow time to pay back the loan. This alleviates the stress of being in default and having to a) find extra money to get through a lean period or b) file for bankruptcy, which leaves both the business owner and the lender out of pocket.
A Simple Application Process
1. Get your business plan in order so that you know how much you need and what you can repay. The collateral you have is the most important part of the loan process.
2. Visit a business lender in person or apply online. Even if you have a poor credit rating, the lender will look at your proposal, as long as you have secure collateral to cover the loan with APR.
Pros and Cons of Secured Business Loans
- You can borrow more substantial amounts at a relatively lower cost
- It is easier to obtain than unsecured finance if your business has a limited track record or the principals have patchy credit ratings
- Flexibility of a much longer repayment period, thus reducing the monthly charge
- Potential loss of the secured asset if repayments are not made
- The interest rate is more likely to be variable. This can work to your advantage if interest rates go down, but you will need to plan carefully at a time when rates rise
Whether you need extra funds to improve your business standing or are a start-up with no credit rating, a secured business loan will be the best way forward.
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