What Are Secured Business Loans?
One of most common forms of business funding occurs via secured business loans. Any type of business funding that’s secured with the help of some form of personal guarantee or asset as collateral is referred to as a secured business loan.
The asset or guarantee that you use as collateral basically acts as a failsafe which ensures that the lender gets back their money one way or another. If you are unable to meet the required repayments of your loan, the collateral can be utilized by the lender to recoup the remaining amount and mitigate any losses.
While there is the danger of losing a valuable asset in the process, secured business loans are usually more preferred as they provide the borrower with lower interest rates and a longer repayment schedule.
Ultimately, when it boils down to securing the right type of funding for the growth of your business, secured business loans offer the best options and terms in today’s lending market.
All You Need To Know About Securing A Business Loan With The Help Of Collateral
So, what do financial lenders refer to when talking about secured business loans?
In order to grant a loan to any applicant, most financial organisations will ask for borrowers to put down a valuable asset as collateral. By providing collateral, the lender has the option to recoup the balance amount of the loan in the event that the borrower is unable to make the remaining repayments.
Then what’s collateral?
Put simply, collateral refers to anything owned by your business or yourself. It is any asset that can translate into cash for the lender. By providing collateral, you are minimising potential risks for the lender in terms of being able to recoup their loan amount. For instance, if you default on your loan repayments, the lender can seize the asset you have listed as collateral, sell it and recoup most (if not all) of their loan amount. Basically, it ensures that they get back the money they loaned out to the borrower.
A responsible borrower does not have much to worry about, as they will in the end get back all/any assets they have listed down as collateral. The financial institution will merely hold the deeds or title of the property till the entirety of the loan amount is paid back along with the interest accrued on it.
What Can You Use As Collateral For Your Small Business Loan?
In reality, the practice of providing assets with high resale value in exchange for a business loan has been around for several hundreds of years.
Even today, collateral remains a highly influential factor in whether or not a business owner gets approved for a small business loan.
The following can be offered as collateral in order to secure a business loan:
- Property
It is highly probable that you will be asked to put down prime real estate assets that you posses as collateral for a small business loan. Property is perhaps the most common form of collateral accepted by majority of lenders and financial institutions.
If you list your home down as collateral in exchange for a business loan, you are in effect giving the lender legal permission to seize your property and sell it, if you are unable to make the requisite repayments on time.
It is possible that you remain highly confident of making the required repayments of your loan at the time of applying. But, businesses are subject to a wide number of risks. What if your business cannot continue to maintain its revenue stream growth? What if you have to rely on your personal savings to pay of business debts, and as a result drain a large portion of it for what remains an unprofitable venture? There are many risks involved when it comes to using your home or any other real estate property you own as collateral for a business loan. Ensure that you are aware of all these risks before you sign on the dotted line.
- Savings
Your personal savings account can also be used as collateral for a small business loan. Such types of loans are also referred as ‘passbook loans’ or ‘cash secured loans’. In this instance, the cash in your savings account serves as a failsafe if you are unable to make your loan repayments on time.
In the unlikely event that you default on your loan, your lender will be legally able to recoup the remaining amount through the cash available in your savings account.
Unsurprisingly, such type of collateral is highly popular among lending institutions as they can recoup their money back almost instantly, without having to go through the legal hassle of seizing and selling a physical asset to do so.
- Invoices
Perhaps one of the most common causes of cash flow issues among emerging business is due to the number of unpaid invoices that keep piling up.
But, in essence these unpaid invoices act as proof of future income and can be served up as collateral for small business loans. This practice of accepting unpaid invoices as collateral for a loan amount is commonly referred to as invoice finance.
- Inventory
If you are looking to secure a loan to purchase inventory for your business, you can provide the same as possible collateral for a small business loan.
So, if you are unable to sell of the products to make timely repayments on the loan amount, your inventory can be seized and sold by the lending organisation to recoup their balance amount.
What You Need To Know About Securing A Small Business Loan With A Personal Guarantee
So, if you don’t own property, equipments or unpaid invoices, is it impossible to secure a small business loan?
Not necessarily.
Many lenders offer secure business loans by asking the borrowers to provide a personal guarantee.
What’s A Personal Guarantee?
A personal guarantee in effect makes you the co-signer on the loan and puts all your personal assets in danger of being seized and liquidated to repay the loan.
The idea behind this not too dissimilar to offering up collateral in exchange for a loan, as it mitigates any potential risks for the lender in being able to recoup the remaining amount.
If you have provided a personal guarantee to secure a business loan, you have made yourself legally responsible to paying off the loan, which in essence means that your personal assets, investments etc. are all up for grabs if you end up defaulting on the loan.
Nowadays, majority of small business loans will need some form of personal guarantee or collateral in order to be approved.
Any reticence in putting all your important assets on the line can be understandable, but ultimately the best way to safeguard yourself against losing those assets is by becoming the most responsible borrower your can be.
If you make all your loan repayments in a timely manner and in full, there is almost zero risk attached to taking out a secured small business loan. Once you make all the repayments, your assets will be safely transferred back to you.
