If you’re a small business owner, applying for secured business loans can be stressful. You may not understand which small business loans you qualify for, or which type is best for your business.
In this article, you’ll learn about the types of secured business loans for small businesses, and the benefits and downsides of each.
What is the Difference Between Secured Business Loans and Unsecured Loans for Small Businesses?
There are two basic types of loans: secured and unsecured. Secured loans require collateral, while unsecured do not.
Secure Business Loan
A secured loan is where you must provide some type of collateral. This collateral may be in the form of business assets or personal assets. Collateral might be a physical asset like property, inventory, equipment, or a vehicle. The collateral can also be in the form of financial assets such as stocks and bonds, mutual funds, or insurance policies.
Secured loans are commonly used for mortgages, vehicle purchases, and business financing.
Unsecured Business Loan
If you’re unable or unwilling to offer collateral, you may decide to apply for an unsecured loan. Unlike business loans secured with collateral, an unsecured loan agreement does not require collateral.
Unsecured loans require a personal guarantee, in the event that you do not make repayment within the time in the loan terms.
Due to the personal risk to your credit and finances, this type of loan is considered more risky than a secured loan. Examples of unsecured loans include student loans, a personal loan, or a credit card.
Loan Amounts: Secured loans have significantly higher loan amounts than unsecured loans. When you provide your assets as collateral, this type of loan is considered safer for the lender. This form of security for a business loan means that the lender can offer increased financing.
Interest Rate: Secured loan interest rates are much lower than their unsecured counterparts. The repayment period for a secured loan is designed to last for many years—up to 30 years, in some cases. Since repayment takes place over such a long period of time, interest rates remain low, alleviating pressure on you as a business owner.
Repayment Time: Secured loans have much longer repayment times than unsecured loans. You aren’t under a time crunch to repay the loan, giving you the freedom to focus on growing your business.
Similarly, here are a few reasons business owners may not want to choose unsecured loans:
Unsecured loans are approved based on your established credit history and credit score. Many small businesses or new start-ups do not have a proven credit history, so they don’t qualify for an unsecured business loan.
Even if your business is eligible, unsecured loans’ lower amounts may not cover the expenses you need. High interest rates and short repayment periods are also drawbacks for small business owners.
What Are Some Disadvantages of Secured Loans for Business?
Business secured loans have a few potential downsides:
Requires Assets: Secured loans require some form of collateral, and if you don’t have anything to offer, then you may not be approved. New businesses may face this challenge, as they don’t yet own many assets.You may choose to put up your own personal assets as collateral. However, you are then directly responsible if your business is not able to make repayment.
Risk to Assets: Since you are putting up your assets as security for the business loan, lenders may seize these assets if repayments are not made.
What Types of Secured Business Loans are Available?
If you’re looking for a secured small business loan, there are different types to consider, including working capital loans and Small Business Administration (SBA) loans.
Businesses that have distinct seasonal highs and lows often use working capital loans to assist them during the period of the year with slower sales.
Small Business Administration (SBA) Loans
SBA loans are provided either through the Small Business Administration, or one of its approved private lenders. SBA loans are very flexible, often used to purchase real estate or equipment, everyday operations costs, or fund a new start-up.
SBA loans are often difficult to qualify for, but they offer the benefit of highly favorable repayment terms.
Small Business Lines of Credit
This financing option gives your business access to a line of credit with a pre-set limit. This financing is generally used to cover short-term costs, similar to working capital loans.
Lines of credit are helpful for small businesses, as they generally have lower interest rates than credit cards.
Instead of providing a lump sum, like other types of loans, a line of credit is an option for ongoing costs.
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Equipment loans are used for the purchase of equipment or machinery, and may also cover costs including delivery, installation or warranties.
Long-Term Business Loans
This type of loan usually lasts three to ten years, although it may last much longer. This financing option may be used to buy real estate or equipment, expand your business, cover employee costs and more.
Long-term loans are a good choice if you’re looking to finance business ventures that may not be immediately profitable. If these ventures require funding right now, but will take time to make money back, a long-term loan is often a good fit.
This type of loan may also provide a significantly higher loan amount than other forms of financing.
Business Expansion Loan
This type of financing is used by businesses to invest in their growth. This often includes physical expansion, hiring additional staff or expanding into new markets.
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This type of loan is ideal for companies that are growing fast and need funds to handle new incoming business.
Invoice factoring, not actually a loan, is a type of financing where you sell your invoices to the lender in exchange for a specified sum. The lender now owns these invoices, and receives payment by collecting from your customers.
Invoice factoring is useful for businesses to cover costs in between the time an invoice is generated and the time the customer actually makes payment.
Merchant Cash Advance
Although merchant cash advances are not a type of loan, they are worth considering in certain circumstances. The lender provides a lump sum in exchange for a percentage of your business’s future credit and debit sales.
This type of financing is helpful for businesses that require funds right away, and it can be used to cover short-term expenses.
How Do I Choose the Right Secured Business Loan?
When considering a secured business loan for your small business, ask yourself these questions:
What part of business operations do I need this money for?
What collateral do I have for a secure loan?
What will the interest rates be?
How will I repay the loan?
Can my business make the payments?
One of Credibly’s experienced advisors will go over the points you need to consider before you secure a loan. Credibly has financed over 30,000 businesses, and we offer a simple online application process for secured commercial loans.