Pros and Cons of a Secured Business Loan
What is a Secured Business Loan?
A secured small business loan is backed by an asset that you have, such as equipment, cars, or real estate. If the loan defaults and you’re unable to repay it, the lender has the right to seize that item as a payment. Since these loans are less risky for the lender, the interest rate is usually lower and easier to obtain for the borrower.
What are the Benefits of Secured Business Loans?
1. Lower Interest Rates
Secured business loans typically have low interest rates than other financing products, such as unsecured business loans, credit cards, or business lines of credit. This is because having secured collateral reduces the lender’s potential risk. Some rates are as low as prime plus one percent.
2. Longer Repayment Terms
Secured loans can have longer repayment terms, sometimes if 10 to 30 years. Ultimately, your lender will provide set terms based on your specific situation. If you’re unable to repay a loan in a shorter term, pursuing a secured loan might be beneficial.
3. Easier to Obtain if Experienced
If your business is established, it’s easier to obtain a secured loan because again, it’s less risky for the lender. In general, most banks and alternative lenders are less likely to work with startups because they haven’t been able to prove themselves yet.
4. Higher Dollar Amounts
Usually, secured loans come in larger amounts because of the risk mitigation for the lender. Since they are less risky, they’re able to provide a larger loan amount. If you’re in need a significant amount of money, you should start considering your collateral so that you can secure business financing.
What are the Downsides of Secured Business Loans?
1. Requires Acceptable Securing Asset
If you don’t have an asset to use as collateral, you won’t be approved for a secured business loan. Luckily, some institutions will allow you to use your savings account as an asset, but usually a physical item is required. Therefore, if you don’t have significant inventory, equipment, or real estate, you probably won’t qualify for this loan option.
2. If You Default, You’ll Likely Lose the Asset
If you’re unable to repay the loan, you’re at risk of losing the assets that you submitted as collateral. This can be extremely detrimental to your business’s future, especially if these assets are pivotal to continuing your operations.
For example, if you own a landscaping company and submit all your tractors as collateral, it would be challenging to continue your business if this equipment is repossessed. In addition, because you must submit the dollar amount that the required collateral is worth, the value could be higher than the value of the loan. Due to this, you could lose an asset that is worth more than a loan, causing major financial strain.
3. Your Business Must Be Established
Although each lender will have their own requirements, most companies will require that a loan recipient has been in business for two years under the same ownership to qualify for a secured loan. In addition, there will also be sales and credit score requirements. Due to this, if your business is new or doesn’t have strong financials, procuring a secured loan will be difficult.
In Conclusion: Have a Business Plan Before You Apply for Additional Working Capital
If you’re an established business owner that has a solid business plan and is looking to grow, a secured loan might be for you. It’s important to have a business plan because you’re risking a lot if you can’t pay back the loan. Consider all the facets mentioned in this post, and only take out as much money as you’ll need to accomplish your goals.
Have you received this type of small business financing? Share your experience with us in the comment section below!
Editor’s Note: This post was updated for accuracy and comprehensiveness in April 2019.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.