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How do secured business loans work?

October 4, 2021
How do secured business loans work?

Put simply, a secured business loan is a product in which you put up collateral in exchange for a lump sum of money. If you make all of your payments on time, your collateral is safe. However, if you default on your loan payments, the lender may take legal action against you to obtain ownership of your collateral.

Types of Secured Business Loans

Although the term “secured business loan” encompasses a huge variety of products, there are several individual types for which you can apply. They include business equity loans, secured term loans, equipment loans, and even secured lines of credit. Each of these offers its own unique set of benefits, and business owners often turn to them when they have less-than- perfect credit since the collateral lessens the risk the lender assumes.

Business Equity Loans and Lines of Credit

Loans and lines of credit based on your business equity have several benefits, but most business owners choose them because they offer low interest rates even with a less-than-perfect personal credit score. However, these products are also quite risky since you may lose your business – or a very large percentage of it – if you default on your payments. Most of the big banks that offer up business equity loans and lines of credit require up to 75% of your business as collateral.

Equipment Loans

Many of the banks across Canada will also provide loans designed specifically for purchasing equipment. In this scenario, imagine that you own a restaurant and you want to purchase a new refrigerator, commercial oven, and walk-in cooler. You can go to the bank and ask for a loan, and the bank may provide you with the funds if you put the equipment up for collateral. This means that you will own the equipment after you make all of the payments, but if you default, the bank can take ownership and possession of the equipment.

Secured Term Loans

Secured term loans are another option, and banks tend to be very flexible about what you can use as collateral for this product. For example, your bank might allow you to use one or more of the following as collateral:

  • Mutual funds
  • Inventory
  • Equipment
  • Accounts receivable
  • Buildings
  • Land

Secured term loans have plenty of benefits, including longer repayment schedules with smaller payments, lower interest rates, and easy qualification when compared to unsecured loans without collateral.

When to Consider Secured Business Loans

A secured business loan is certainly not the right choice for everyone, but it can come in handy in a variety of situations. For example, if your current retail location is a success and you want to open a second store, you could use your first location as collateral to get a loan for the second. As long as you foresee the business’s ability to continue to generate enough revenue to keep it running and repay the loan according to the terms, there is little risk involved.

Secured business loans are fantastic options for business owners who have less-than-perfect credit or who want to avoid high fees and interest rates. However, it is important to take the time to analyze your business beforehand since there is always a risk of losing whatever property or equipment you use as collateral.

Ready to grow your business and find new customers our there ready to try your product? Find out more about our small business loans.

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