When Does it Make Sense to Get a Secured Business Loan?
Below, we highlight some of the common scenarios where it typically (though not always) makes sense to get a secured business loan:
To Reduce the Total Cost of Borrowing
All else being equal, a secured business loan will offer a lower total cost of borrowing vs. an unsecured business loan. However, for some businesses speed is more valuable than bottom-line costs (e.g. to exploit a very time-limited golden opportunity). In this case, it could be wiser to obtain an unsecured business loan, since they typically take days to administer since there is no collateral to evaluate.
When a Large Amount of Funding is Required
While it’s certainly possible to get a relatively large unsecured business loan, it’s significantly faster, easier and more viable when the funding is secured by collateral. This is simply because collateral gives lenders more confidence and flexibility.
To Leverage Existing Assets
Some types of secured business loans — such as inventory financing — leverage a business’s inventory (or raw materials that will be manufactured into inventory) as collateral. In this way, the business is essentially pledging a portion of future revenues, in order to access working capital now. If everything works out the way it should, all borrowing costs are fully covered by future revenues, and there is sufficient profit remaining to make the borrowing worthwhile.
To Obtain a Longer Term
While it’s possible to obtain an unsecured business loan with a 1+ year repayment period, it’s typically faster, easier and more viable to obtain this through a secured business loan. Again, it simply comes down to risk exposure. Lenders feel safer when pledged assets are part of the deal, and are therefore more comfortable with longer terms — including some that can last for several years.
Is a Secured Business Loan Right for Your Business?
A secured loan might be right for your business if all of the following apply:
- You have sufficient business and/or personal assets to pledge as collateral.
- You do not need funds immediately (if so, then you may be able to obtain a smaller short-term unsecured business loan right away, and also apply for longer and larger secured business loan).
- You need or want a longer repayment term (e.g. more than one year).
Learn More About Secured Business Financing
To learn more about when it makes sense to obtain a secured business loan — and when it may be wiser to obtain an unsecured loan (either instead of or in conjunction with a secured business loan), contact the National Business Capital team today. We offer both secured and unsecured business loans, and will provide you with clear information so that you can make a smart and safe business funding decision. As always, your consultation with us is free.