If you’re in the market for business funding, then you’ve already discovered that just like health care, law and even sports, the lending marketplace has its own vocabulary (read: jargon) that can make the process seem confusing — or intimidating. After all, we aren’t talking about slugging percentage or wins-above-replacement numbers: we’re talking about the success, and perhaps even survival of your business. Clarity and accuracy isn’t just a good idea, but it’s imperative.
With this in mind, let’s focus on a common term in the lending marketplace that, despite its prevalence, is still widely misunderstood by some borrowers — largely because it is not well explained (sometimes accidentally, other times deliberately) by some lenders: secured business loans.
What Are Secured Business Loans?
The simplest way to grasp secured business loans is to swap out the word “secured” and replace it with the term “collateral-backed” — because all such loans require collateral, which are business and/or personal assets. In return for securing a loan with collateral, lenders offer borrowers reduced interest rates compared to unsecured business loans.
Note that some financial institutions, like banks, don’t offer unsecured business loans. However, many firms in the alternative lending marketplace offer a mix of secured and unsecured business loans, along with other products like inventory financing (where inventory is used as collateral), invoice financing (where accounts receivables are used as collateral — also called factoring), and business lines of credit (which are usually unsecured).
What Kinds of Businesses Seek Secured Business Loans
There’s no specific type or size of business for which secured business loans are designed. They’re useful for small businesses, MMOs and large enterprises. The key, however, is ensuring that a borrower has sufficient collateral — such as mutual funds, vehicles, equipment, land, buildings, inventory, invoices, and so on.
More About Collateral Valuation
Collateral valuation takes place before a secured loan is approved, and in most cases, the borrower must may pay valuation costs up front (i.e. the fee cannot be added to the overall loan and paid back over time). However, the amount is usually reasonable.
In addition, the collateral valuation process can take time. Firms in the alternative lending marketplace tend to be quicker about this than banks, which can take several months to assign values to assets. Because of this time factor, some businesses that would otherwise qualify for a secured business loan opt instead for an unsecured business loan. The interest rate is higher, but they could have access to anywhere from $10,000 to over $1 million in a matter of days vs. months. If there’s a golden time-limited opportunity or an urgent expense to cover, it might make financial sense in the bigger picture.
The Bottom Line
The best thing you can do to make a smart and safe borrowing decision is ask as many questions as you want — there are no bad questions! — and ensure that you’re very comfortable with a prospective lender. If you feel any pressure or detect that your questions are merely being re-packaged and fed back to you, then walk away. If you aren’t treated properly and professionally before you get the loan, then things won’t get better for afterwards. They’ll get worse.
The good news, however, is that there are credible and established firms that provide secured business loans, and they’re easy to find by reading testimonials and checking to see that they’re accredited with the BBB and have an A+ rating.