The Pros And Cons Of Secured Business Loans

One financing option offered by lending institutions to businesses is secured business loans. The lender expects the business entity to provide assets that act as collateral against the loan. Some assets you can use as collateral include stock, machinery, motor vehicles, and real estate.

For most small businesses, secured loans are a popular financing option. They’re typically easier to qualify for than unsecured loans and often come with lower interest rates. Remember that unsecured business loans come with a variable interest rate. As a result, you should make room for any changes in interest rates in the future. The interest rate also depends on your repayment duration, the collateral offered, and the loan amount. 

To know if a secured business loan is right for you, websites like https://www.smebusinessloansaustralia.com/ offers a few pointers on these credit facilities. Still, secured loans also have their drawbacks. Before applying, here’s a guide on the pros and cons of secured business loans.

Pro: Low-Interest Rates And Fast Approvals

Because you offer collateral as a security for the loan, your risk of default is minimal. This is why secured business loans come with lower interest rates compared to unsecured loans.

Moreover, by providing security for the loan, you accept a shared risk with the bank in case you can’t repay the loan. For this reason, it’s easier for the bank to approve your loan since much of the risk is on you, the borrower.

Pro: Bigger Loans

Depending on the security you offer, you are likely to get a bigger loan than if you had taken an unsecured loan because of the minimal risk involved.

Pro: Lending To Clients with Poor Credit History

If your business has a bad credit history, it might take you years to clean it up. This affects your capability to borrow, especially if you consider applying for an unsecured loan. However, with secured loans, most financial institutions will still offer you loans with collateral, even with a poor credit rating and history.

Pro: Extended Repayment Period

You get a longer repayment duration for secured loans, as opposed to unsecured business loans. A more extended repayment period also means your monthly instalments are slightly lower and will not affect your cash flow.

Con: High Risk For Your Business

As with any business loan, a secured loan is risky. Suppose your business isn’t doing well and can’t meet its financial obligations. In that case, the lending organization can repossess the collateral you used as security to recover its money, which can mean your business losing its high-value assets.

Con: Collateral Is Mandatory

Even if the business is doing very well but has no assets to provide against the loan, getting a secured loan is close to impossible. These disadvantages companies without assets since they don’t have anything to put up as collateral, meaning they can’t access this loan type.

Con: Upfront Charges

Businesses intending to borrow must pay valuation and legal fees upfront, even before signing the offer letter. This means you can lose your money if the loan is not appraised or if the valuation report deems your collateral lower than earlier anticipated. In this case, your loan amount is lower, yet the lender won’t refund you the charges you paid.

Con: Longer Appraisal Period

It takes a shorter period for unsecured loans to be approved since no security is involved. But for a secured business loan, the appraisal period is longer since the organization has to perform its due diligence on the security to be used. If you are using your land title or log books as collateral, it takes a while before the bank can legally co-own the property with you. This means a longer time before you are advanced the cash.

Requirements You Need For A Secured Business Loan

You might think that getting a secured business loan is a sure thing, but banks and other financial institutions have their own criteria for loan approval. Here are some of the requirements they consider:

• Collateral: Generally speaking, the collateral should be higher than the loan amount requested and should cover any risks in the future comprehensively.

• Operational History: Banks are always hesitant to give loans to businesses that have been in existence for less than two years. This is because the risks involved are higher, and the chances of non-payment are also high.

• Financial And Bank Statements: Your cash flows should cover the monthly repayment instalments and running costs for the business adequately. That way, you don’t jeopardize your business operations.

• Business Credit Score And History: Your past credit history and current credit score determine how much you can get for your loan.

• Board’s Credit History: Whether it’s a partnership or a limited liability company, some lending institutions may look at the board’s credit history or request that they give personal guarantees for the business loan.

These are the common requirements lending institutions ask their borrowers. Still, some might ask you for your business plan, insurance policies or even an exit strategy if you default on your loan.

Conclusion

A secured business loan might look like a better option to finance your business. Still, you must decide whether it’s a sustainable option. Consider the impact the loan has on your business’ profitability and whether the risks involved are worth losing the assets you use as collateral.