Secured Business Loans: National’s Ultimate Guide to Loan Collateral
Joseph Camberato
Founder & CEO
Published Apr 29, 2019
11 min read
The growth and success of most businesses often require access to additional funds. If your small business is in need of extra money, secured loans can be the key to overcoming challenges or taking advantage of available opportunities.
Jump Into The Guide…
A secured loan is a type of financing that is backed by collateral. This collateral is leveraged by business owners in order to provide lenders with a sense of “security” in case of foreclosure.
This loan requires upfront collateral, which reduces risk for the lender. This enables them to provide a lower interest rate that can be paid back more easily by the borrower.
Financial institutions typically offer secured financing to business owners who require capital to start a new business, expand an existing one, or pay for business-related expenses.
However, there’s more to the story here — and it’s essential for borrowers to clearly understand the commitments they’re making or risks they face before entering into a secured loan agreement, not after.
To that end, here are 9 things borrowers need to know:
9 Things You Need to Know About Secured Business Funding
The fundamental purpose of securing a loan is to lower the lender’s risk — not the borrower’s.
Collateral is not limited to business assets but can also include personal assets (e.g., the borrower’s home, car, etc.). Some lenders insist on cash-secured loans because they don’t want to liquidate the collateral.
Some lenders insist on blanket liens, which essentially means they can seize any asset(s) related to a borrower’s business to make up for any missed payments.
Banks and other lenders can — and often do — undervalue collateral, in order to further reduce their risk.
Borrowers — not lenders — must pay up front fees for collateral valuation (and borrowers have no appeal or recourse if they don’t agree with the valuation, which as noted above is often much lower than fair market rate).
Secured loans are often pegged to variable interest rates, which means that payments will rise if rates go up during the loan term.
Paying a loan back early will not result in any interest savings. On the contrary, it will trigger penalties.
Secured loans usually take several months to set up.
Successfully repaying a secured loan doesn’t boost a business credit score as much as successfully repaying an unsecured loan.
Benefits of Secured Business Loans
Unsecured business loans are financing options that do not require collateral. They can be great options for business owners who have limited assets and want to protect their personal or business real estate. However, unsecured financing does not help build credit and establish lasting relationships with lenders. A secured business loan is the best option to achieve these kinds of goals.
That’s why with a secured financing, you’ll find that traditional lenders feel safer, interest rates are generally lower, and terms are generally more agreeable to the borrower’s business needs.
Why Secure a Business Loan?
Utilizing secured financing is a great way to ensure a lower interest rate, a longer repayment period, and the opportunity to build credit and forge a relationship between business and credit provider. If your cash flow or other qualifications fall below acceptable standards, collateralizing an asset can get your foot in the door.
National Business Capital strives to understand each business’ unique history, present position, and future needs to provide the best financial assistance possible. Our advisors learn your business until we’re just as familiar with it as you are, allowing us to offer specialized advice on whether securing a business loan is right for your business. We’ll provide honest feedback, professional insights, and relentless advocacy for your long-term success.
3 Common Problems When Applying – And How to Solve Them
1. Not Having Enough Collateral.
Many borrowers simply don’t have enough collateral to obtain a secured loan. What’s more, some lenders — and especially banks — are notorious for under-valuing collateral, because it further reduces their risk exposure.
For example, a piece of high-end industrial equipment that 10 out of 10 marketplace experts would say is worth $60,000 might be valued by a lender at $40,000. If the unsecured loan requires $60,000 worth of collateral, the borrower will need to pledge another $20,000. Is this unfair? Yes. Does it happen all the time? Unfortunately, that’s another yes.
2. A Time-Consuming Process (If Using Traditional Lending Methods)
Many lenders who insist on collateral refuse to expedite the valuation process, frankly, because it’s not in their interest to do so.
Unfortunately, this means that the loan application process can take several months, which is simply not feasible for many borrowers. Some need funds within days to cover unexpected expenses or take advantage of limited-time opportunities.
Fortunately, National Business Capital’s diverse lender platform contains many non-bank lending sources, which have significantly shorter underwriting processes.
3. High and Non-Refundable Up-Front Costs.
Many borrowers who pledge personal and/or business assets are unpleasantly surprised to discover that they — and not the lender — must pay for the collateral valuation.
This amount can be hundreds or thousands of dollars, must be paid up-front, and there’s no guarantee that the valuation will be sufficient to cover the loan. If not, then prospective borrowers do not get their up-front fees back.
Fortunately, companies like National offer secured business financing options with little to no upfront costs, regardless of credit score and financial history.
What Companies Utilize Secured Small Business Loans?
All types of small businesses could benefit greatly from this type of loan. However, companies that have mutual funds, vehicles, inventory, equipment, accounts receivable, land, buildings or other real estate to put up as collateral will have significantly lower payments, and significantly longer repayment periods. Compared to unsecured, collateral-free loans, secured funding typically comes with better terms.
What Is an Unsecured Loan?
Unsecured business financing isn’t secured by assets or collateral. Instead, borrowers provide a personal guarantee that they’ll pay back the loan regularly, in full, and on time.
There are both term loans without collateral and business lines of credit. These are great options for business owners with limited assets, as well as those that simply that do not feel comfortable with leveraging their own personal or business property.
3 Key Differences Between Secured and Unsecured
Pledging Collateral: The biggest difference between unsecured and secured is that the latter is backed (i.e., secured) by collateral, which can be physical assets such as buildings, equipment, and vehicles, or financial instruments like securities, cash, and so on. In the event that a borrower breaches the terms and agreements from the loan, the lender offers — which can include missing a payment — the lender can take possession of some or all of the collateral and liquidate it to cover the debt. Of course, this doesn’t mean that borrowers don’t have to pay back unsecured loans; obviously, they do! However, in the event of a missed payment or other material agreement breach, the lender must attempt to recover the debt through collections, which must follow procedures as prescribed by law (including registered letters notifying borrowers of impending action). What’s more, many borrowers do not have enough collateral to obtain a secured loan — especially since it is lenders who determine the value of pledged assets vs. borrowers. For example, industrial equipment that is easily worth $50,000 may only be valued by banks at $25,000.
Total Cost of Borrowing: Another difference is the total cost of borrowing. Since lenders who offer unsecured financing take on more risk, the total cost of borrowing is relatively higher vs. secured loans. However, the amount of this spread varies, and in some cases it is significantly less than some borrowers have been led to believe. This is because most banks and other lenders oblige borrowers to pay for collateral valuation, and there can be other fees as well.
Application Time: The third key difference is that, because they do not require collateral valuation, are much simpler to administer than secured loans. For example, an unsecured loan application can be approved in a day, and cash flow can be made available within a week. Alternatively, secured loan applications can take several weeks or even months to put together.
Where to Get Your Secured Business Loan
You can get one through traditional lenders, in which secured financing is extremely difficult to qualify for, and can take upwards of months to receive funding.
Or, you can get secured financing through a non-bank lender, like those within National Business Capital’s platform, who streamlines and expedites the funding process to get you the secured funds you need, exactly when you need it.
Without any confusing jargon, our expert Business Finance Advisors clearly explain how our different unsecured and secured business loans work, answer questions that are specific to your business and objectives, and empower you to make the smartest and safest choice for your business.
Our goal is to help you boost your business loan IQ, and make a decision that is in YOUR best interest — not your lender’s!
Is Unsecured or Secured Financing Right for You?
It’s beyond the scope of this (or any other) article to definitively advise you on whether an unsecured or secured financing is right for you. It’s best to speak with an expert in the topic for a personalized answer.
However, many borrowers who wisely perform their due diligence opt for an unsecured loan because it’s more versatile and flexible than a secured loan, and the application process much simpler, easier and faster.
Different Types of Loans for Any Specific Need
Mo business should be penalized for being designed in a way that benefits from one type of loan over another.
We offer a vast variety of secured financing and credit lines with terms that always accommodate to the needs of our customers. Because every business deserves an equal chance at success, and an equal level of respect, am I right?
Bad Credit Options for Secured Business Loans
You don’t need stellar credit and a spotless financial history. National offers secured financing options for business owners of all credit profiles, including:
Qualifications for Bad Credit Secured Business Loans
Business owners with poor FICO scores will need to do at least $500,000 in annual gross sales and have been in business for at least 1 year to get approved for bad credit secured funding through National Business Capital.
How to Get a Secured Business Loan [5 Simple Steps]
Here are the 5 simple steps to take in order to get a secured business loan:
Work with your advisor to customize your application and obtain the best secured financing offers for your business in the marketplace.
Our advisors will then compare specialized secured business lenders in the global marketplace to find the perfect few matches for your business.
Start receiving multiple offers for secured financing through your advisor, who will consult with you to determine the best financing offer with terms and requirements that perfectly fit your needs.
Finalize your contract and receive your funds!
Be sure to ask yourself…
Consider what assets you feel comfortable leveraging. Would you rather leverage your personal assets, or your business’s?
Ask yourself whether you’d rather leverage someone else’s assets as collateral?
What kind of repayment terms are you after? Fixed? Flexible? Weekly? Monthly? Cyclical payments? No matter what you’re after, we have the perfect funding option for you.
What are you going to use your funds for? A short-term improvement or fix? Grasping a huge opportunity for success? Overcoming a business challenge? Need a little working capital?
How much do you need? It might sound like a simple/obvious question, but in reality it can be one of the most difficult to answer. Financing that offers too-little can leave you unable to fund your business goals. Too much can leave you repaying excess money that you don’t need for a long, long time. Take the time to think about this!
ABOUT THE AUTHOR
Joseph Camberato
Founder & CEO
Joe Camberato is the CEO and Founder of National Business Capital. Beginning in 2007 out of a spare bedroom, Joe and his team have financed $2+ billion through more than 27,000 transactions for businesses nationwide. He’s made it his calling to deliver the educational and financial resources businesses need to thrive.
