A secured business loan is a type of loan where the borrower pledges some asset as a form of collateral for the loan. The asset in a secured business loan can be anything that represents worth. A lien on a property, vehicles, office space, or seemingly anything that represents some form of financial value can be viewed as acceptable collateral in a secured business loan.
The asset pledged protects the financial institution or lender from facing the loss of a default. If the borrower fails to repay the loan in full, the lender will take over the collateral to recoup the loss incurred from the loan. The collateral represents a down payment or security deposit; the lender will use the asset pledged at the beginning of the loan period to ensure themselves against a failure to repay the loan.
A company will take part in a secured business loan to lower their interest rate and increase the amount of money lent. Typically a secured business loan, when compared to an unsecured business loan, offers the lender a more suitable form of financing. The presence of the collateral means everything; an unsecured business loan, which does not possess such collateral, is agreed upon without any form of backing for the lender.
As a result, these loans are attached with exorbitant interest rates and typically shorter terms and lower amounts. In contrast, as a result of the collateral present, a secured business loan will be attached with lower interest rates, longer term lengths, and an increased amount of money.
The collateral associated with secured business loans is crucial. The collateral and the details associated, including equity in the business, equity available, borrowed funds and existing cash present, will affect the variables associated with the loan. Along with the collateral, secured business loans also require financial statements of the business, personal income statements, a company outline, a company budget report, and a credit check.
Although a secured business loan offers a form of collateral to protect the lender, it is still crucial that the bank qualifies the business to protect against defaulting.