Advantages and Disadvantages Of A Secured Business Loan

secured business loanA secured business loan as a source of capital financing offers your business advantages to fund new business opportunities, inventory purchases and improve cash flow. However, this type of business loan also is with risk since your business needs to pledge a collateral asset as a guarantee to secure the financing.

What Is A Secured Business Loan?

A secured business loan is backed by a valuable business asset such as equipment, vehicles, or real estate. Since this type of business loan is backed by a collateral asset, there is less risk to the lender, resulting in more favorable loan terms (e.g., interest rate) and is easier to qualify for by the borrower. If your business is unable to pay back the loan (default), the lender has the right to seize the collateral asset as a payment, which may be of greater value than the actual loan.

Advantages Of A Secured Business Loan

  • Lower Interest Rates – Secured business loans typically have low interest rates than other financing products, such as unsecured loans, credit cards, or lines of credit. This is because having secured collateral reduces the lender’s potential risk.
  • Longer Repayment Terms – Secured loans can have longer repayment terms, sometimes as long as 10 to 30 years. Your lender will provide set terms based on your business needs and situation. If your business would benefit from extended payment terms, a secured business loan would be an advantage.  Note that the longer the payment terms of the loan, the higher will be the total financial cost of the additional capital.
  • Easier to Qualify – If your business is established and profitable, normally more than two years under the same management, it’s easier to obtain a since it is less risky for the lender since it has claim on the secured asset.
  • Higher Capital Amounts – Secured business loans come in larger amounts because of the lower risk for the lender.  As with any financial loan, the amount that you borrow should be what you need, not what you want.  You will need to balance the loan amount with the collateral asset you need to pledge to the lender.   For example, if your collateral asset is your business building, you should have a market appraisal value to determine if the loan amount requested is in proportion.  If not, consider some other business asset to pledge as collateral for the loan.

Disadvantages Of A Secured Business Loan

  • Pledge Of Collateral Asset – You must pledge a business asset that is acceptable to the lender to secure the loan.  Normally this is a physical asset, such as a building, equipment or vehicles.  Some lenders also consider for certificates of deposit of long duration as a means to reduce risk.  Without an acceptable business asset, your business will not qualify for this financing option.
  • Risk Of Default and Loss Of Asset – If your business is unable to repay the loan (default), the lender can and likely will take possession of the collateral asset.  Also, the value of the collateral asset lost may be greater than the actual value of the secured business loan (e.g., building or real-estate).  Your business may not survive the loss of the pledged asset if it critical to its operations.
  • Start Ups Need Not Apply – Lenders requirements of loan recipients  normally require that a business have as least two years under the same ownership and be profitable to qualify for a secured business loan.  While the lender will take into consideration the credit and financials of the business, it is the type and value of the collateral asset pledged that will be the major consideration.   If your business is new or doesn’t have strong financials, getting approval of a secured loan will be difficult.
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Conclusion

A secured business loan offers advantages to established businesses as a financing option.  Since your business pledges a collateral asset as guaranty of payment to the lender, a secured business loan is generally lower in cost with favorable payment terms.  However the risk of loss of the asset due to loan default requires that you be prudent in the amount of loan that you need, based on a realistic business plan to accomplish your goals.

Please call us at (888) 213-3383 to help review which financial product best serves your business needs or Contact Us via Email.

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