How to get a secured business loan
One of the many decisions small business owners must make when seeking funding is whether to get an unsecured or secured business loan.
A secured business loan is backed by company assets, which work as collateral. If the business fails to repay the loan, the lending institution can seize the collateral to recoup its funding. But providing collateral can be worth it to land a higher amount or lower rate.
Getting a secured business loan works like getting any business loan, just with the added step of providing information about your collateral.
1. Review your business’s qualifications
Each lending institution sets its own requirements for securing a business loan. However, there are many common requirements.
One key factor is the business’s annual revenue. Often the minimum revenue required for an unsecured term loan is higher than the revenue requirement for a loan backed by collateral. That’s because the collateral’s value offsets the risk the lender takes on by lending to a less-prosperous business.
Lenders may review your business and personal credit score. A high score could result in a higher loan amount and lower interest rate.
Other factors include how long the company has been in business, the purpose of the funds and the company’s plan for repaying the loan.
2. Calculate how much money you need — and how much you can afford to repay
Knowing how much money your business needs and the monthly amount it can afford to pay will help you compare banks and submit applications.
For example, if you need $50,000 but can’t afford the payment for a three-year term, you may want to increase the length of the loan to four or five years. A business loan calculator will help you determine your monthly payment based on the amount borrowed, the loan’s length and its interest rate.
You’ll also want to determine if you need all the funding at once, as you would if buying equipment or a vehicle. If you need a smaller amount now and the rest later, you may want to consider a business line of credit. These enable you to only make payments on the money you’re currently using and draw the remainder as needed.
3. Choose your collateral
Businesses can use various assets to secure a business loan. Common assets are real estate, equipment and vehicles. If you’re using previously purchased property to secure a new business loan, you may need to get the property appraised — though sometimes the lender handles that step.
Other assets that can serve as collateral are your company’s inventory, invoices, savings and investments.
Lending institutions may require the collateral’s value to match the loan’s amount. For a $50,000 loan, you would need collateral worth $50,000.
However, since the value of some assets, such as property and equipment, is subjective, the bank may place a lower value on the collateral than you would. If this happens, you must come up with additional collateral, increase the amount of your down payment or accept a reduced loan amount.
Some lenders may require a UCC (Uniform Commercial Code) lien. This can be filed against an individual asset or as a blanket lien against all business assets. It protects the lending institution if the business files for bankruptcy. Since a UCC lien could potentially put all business assets at risk, this may be another factor to consider when choosing between lending institutions.
Bankrate tip
You may also be able to use personal assets as collateral. Just keep in mind that if you fail to repay your loan, you will likely lose the collateral.
4. Compare lenders and loans
There are options for secured business loans beyond large national banks like PNC Bank and small, community banks and credit unions. Online lenders also offer secured term loans, lines of credit and other business loan products.
Generally speaking, traditional lenders offer lower rates, while online lenders offer faster and easier-to-access funding. Make sure to compare both.
5. Gather your documents
Each lending institution requires a number of documents related to yourself and your business as part of the application process. This could include your business’s articles of incorporation, financial statements, tax returns and more. The lender should provide you with a list of its requirements.
6. Complete your applications
Many lenders online application, though some traditional lenders might require you to apply over the phone or in person.
To make the process easier, gather all the information in advance. This may include the amount you’re requesting, your preferred term length and requested documentation. Additionally, you may need to have the owner or owners’ address, phone number, date of birth and Social Security number.
Secured business loan FAQs
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