If you want a loan based on assets owned by your company — a secured business loan may be what you need.
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What is a secured business loan?
A secured business loan is a loan that requires security or collateral. This collateral or security can be sold by a lender, to offset losses, in the event that a business fails to repay a loan. This differs with an unsecured loan — where lending is done more on the basis of credit history.
Secured loans are a form of asset-based lending.
Secured loans — considerations
Lenders will normally only offer unsecured loans, to businesses with established trading history and good credit ratings. Companies that lack either of these two factors, can only consider secured loans. A secured business loan is suitable for businesses that own assets like machinery, vehicles and commercial real estate, or businesses with executives that don’t want to offer personal guarantees.
Secured business loans can be thought of as a way to “unlock” cash — by using already existing company assets as security (collateral). The more valuable the assets, the greater the value of loan—that can be approved by a bank.
As the potential funding is secured by a physical asset, this lowers the perceived amount of risk to a lender. Should you not be able to keep up with repayments, they can recoup their losses — with the collateral offered. This lower risk, gives banks greater confidence in funding your business. As such, they won’t require personal guarantees or need to look to hard into your trading history and credit ratings.
A number of assets can be accepted as collateral for a loan, with popular forms of collateral being commercial property — land, warehouses, farms etc.
Asset refinancing can be considered as a type of secured loan.
How do secured business loans work?
The loan application process for a secured business loan is quite simple. You make an application, giving basic information such as how much you require and how long you need the money for. Details of the security offered would also need to be stated. Using the information you provided, lenders can then asses risk levels, check credit scores and proceed to value the asset you’d like to put up as collateral.
Should their requirements be met, the lender will make you an offer. The offer will contain details on how much they are prepared to give, payback period and interest rate charges. If you accept, funds will be deposited in your designated business account in short-time.
Benefits of a secured loan
- Lower interest rates than unsecured loans
- Longer term loans available
- Larger loan amounts offered
- Less focus on companies trading history
Limitations of a secured loan
- Requires collateral
- Longer time to process — due to asset valuations
- More paperwork involved
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