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When Secured Business Loans are a Good Idea


Have you ever considered secured business loans for your organization? Most small business owners who are are starting out will eventually need extra money; the growth of their business endeavor will depend upon it. If your small business is at this point, you will have to decide whether you want a secured loan or an unsecured loan. It can be a difficult choice.

Unsecured loans initially sound more attractive; they come quickly and they usually do not require any personal collateral. These are, however, not always the best options. Consider the following reasons.

Secure vs. Unsecured Loans

Basically, a secured business loan is a security instrument that financial institutions offer to business owners who want to start new businesses or expand their existing ones. A secured loan requires upfront collateral such as mutual funds, land, or a building that you own. The collateral is the most important aspect of secured business loans because it reduces the risk for the lending company; the banks feel more secure because if you default on your loan, they can re-coop losses by claiming the property put up as collateral. When a loan is secured, the interest rate that the borrower pays will be lower.

Unsecured loans are riskier for the bank. You will not have to offer up any property to reduce the bank's risk, but you will pay a higher interest rate on the loan (another method to protect the bank).

Poor Credit Scores

If you have a poor credit score, banks are more apt to lend higher amounts to you when the loan is secured. They will even offer a lower APR (annual percentage rate) to a borrower with bad credit on a secured loan (the opposite is true if the loan is unsecured).

This is a great option if you want to start a new business or expand your business and have property, but are recovering from a poor credit score. In this case, the lender will overlook your poor credit score, and use your collateral to secure the loan.

If your secured business loan is approved, you will have a lower APR rate and very likely a longer repayment period. This can make it affordable for startup small businesses to get the cash they need during a time when profits are just starting to grow.

Of course, if your small business has a faulty business plan or fails to grow for any number of reasons, the loan collateral will be at risk. Simply put; if you don't pay your loan back, then the collateral you placed up front to secure your loan can be taken.

Using Secured Business Loan Proceeds

You can use your secured business loans to purchase more property for your business, pay for business-related expenses, or for starting a new business all together. Unsecured loans, on the other hand, usually have more stringent requirements; e.g. that your business has existed for at least two years.

Applying for Secured Business Loans

It is fairly easy to apply for secured business loans. You can go to the institution, such as a bank or other financial lending company, and apply in person. Some institutions also permit you to apply online. Consider various APR rates before you apply to one specific institution.

In addition, you might feel more comfortable applying with the financial institution at which you currently bank, and the bank may also feel more comfortable lending to an existing customer.

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