The Top Secured Business Loans for Your Small Business

Updated on March 18, 2020
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What Are Secured Business Loans?

Secured business loans are a common type of small business financing that’s secured by some type of personal guarantee or valuable asset. If you aren’t able to repay your loan, the lender can use the collateralized assets or personal guarantee to legally recoup their losses.

In the end, you’ll get a better loan offer—lower interest rates and longer terms—with secured business loans. In some ways, you’re giving the lender a sense of security—they’re guaranteed to get their money back one way or another.

Secured business loans are some of the best financing options on the market. And in reality, most types of business loans are secured in some way or another.

In this guide, we’ll review what secured business loans are, what types of secured loans are out there, and where you can apply to the best.

Why Secure a Business Loan?

Taking on debt is a risky deal—for both the business owner and the lender. And if you apply for a business loan and get rejected, chances are, the lender thought that lending to your business was too risky for them.

To cover their interests and protect themselves against risky borrowers, lenders secure business loans.

These days, when you hear the term “unsecured business loan,” you should proceed with caution.

Almost every small business loan out there is secured in some form—there technically aren’t business loans without collateral requirements available.

Here are the different ways lenders secure business loans.

Securing a Small Business Loan With Collateral

Most small business lenders will require borrowers to put down collateral in order to take out a loan. By offering collateral, you’re securing the loan by giving the lender the right to seize and liquidate specific assets in the event that you can’t repay your loan.

Collateral is simply something that you or your business owns that can be turned into cash. And when you put down collateral, you’re reducing the lender’s risk: If you default on your loan, the lender can recoup the money they’re owed by seizing your collateral.

If you’re a responsible borrower, your assets will remain with you. The lender simply holds the title or deed to the asset you offer as collateral until your loan is paid in full.

What Kind of Collateral Can You Use to Secure a Loan?

As we discussed above, collateral is very important when it comes to getting business financing, as secured loans decrease the lender’s risk and make them more willing to loan you the capital you need. What can you offer up as collateral to get a secured business loan? Here are some options:

 

    Property

    When you apply for secured business loans, you might be asked to put up your real estate assets or home equity as collateral for the loan. This is the most common type of collateral used by borrowers.

    When you put up your home or real estate holdings to get a loan for your business, you’re giving the lender permission to seize these assets if you default on your loan.

    However, real property doesn’t refer only to real estate. You can also offer equipment, cars, motorcycles, boats, and so on as collateral for secured business loans.

    Savings

    You can also use the savings in your bank account as collateral for your loan. Sometimes referred to as “cash-secured loans” or “passbook loans,” these secured business loans use the cash in your bank to serve as collateral for the loan.

    If you default on your loan, the lender can liquidate your account in order to recoup their money.

    It’s no surprise that lenders prefer to secure loans with this type of collateral. It’s very low risk for them—if you default, they can instantly get their money back. Plus, they won’t have to go through the hassle of selling a physical asset, such as a house, a piece of equipment, or a car.

    Invoices

    Many small business owners have customers who don’t pay their invoices—and suffer cash flow issues because of it.

    Well, those unpaid invoices represent income for your company, and they can be offered up as collateral for loans, too. Many lenders agree to accept collateral based on outstanding invoices through a process called invoice financing. (We’ll get more into this later.)

    Inventory

    If you need business financing to purchase inventory, you can offer that inventory up as collateral for your loan.

    We’ll get into the details later, but essentially, the inventory acts as collateral for the loan in case you’re not able to sell your products and default because of it.

    Blanket Liens

    A lien is a legal claim that comes attached to a business loan allowing the lender to seize and sell the assets of a business in case it defaults.

    As the term “blanket” might suggest, a blanket lien is the most comprehensive lien—and the best for the lender. Blanket liens give lenders free rein to take every asset and any form of collateral a business owns in order to get their money back.

    You will want to be wary of blanket liens, as you can lose everything if you default on your loan and you’ll have a harder time securing a new loan to fulfill your existing debts with a blanket lien in place. This is because lenders typically want to be in the “first lien position,” meaning they have first dibs on your assets in the event of default. If a lender offers a loan to a business that already has a blanket lien in place, that loan will likely be very expensive.

Securing a Business Loan With a Personal Guarantee

Secured business loans can be secured by other means besides physical collateral. So if you don’t have a real estate holding, vehicle, or equipment of sufficient value to secure your business loan, you’re not out of secured financing options.

Lenders can also give secured business loans by asking borrowers to provide a personal guarantee.

    What Is a Personal Guarantee?

    A personal guarantee is an agreement with your lender that puts your personal assets on the line—making you the loan’s co-signer.

    When it comes to personal guarantees, the idea isn’t all that different than putting up collateral. It gives lenders a way to minimize their risk when they lend to your business.

    If you’ve given your lender a personal guarantee and you default on your loan, you are personally responsible for repaying the loan.

    This means that creditors can claim your personal assets as repayment—whether that’s your home, investment accounts, and so on.

    Unlimited Personal Guarantee

    When you secure a business loan with a personal guarantee, lenders may ask for an unlimited personal guarantee.

    This means that lenders can recover 100% of the loan amount, plus any legal fees associated with the loan.

    Therefore, if your business fails and you default on your loan, your lender can hire lawyers to gain a judgement in their favor, giving them legal ability to go after any or all of your personal assets.

    This could be your life savings, your retirement savings, your house, your kid’s education fund—even your spouse’s personal assets are fair game.

    Until they reclaim the total cost of the loan, plus interest and legal fees, lenders can seize any personal asset they want.

    Of course, the amount of your personal assets that the lender can seize as repayment depends on how much you still owe on your loan. So if you aren’t looking for a huge loan—say you only need $10,000—you likely won’t lose everything you own.

    Limited Personal Guarantees

    A limited personal guarantee, on the other hand, sets specific parameters on what can be seized if you default on your loan. A limited personal guarantee will usually be limited by a dollar amount.

    A limited personal guarantee is most often used when multiple business partners take out a loan for the company together. So if you have a certain percentage of ownership in your business, you should be prepared to be a part of the guaranteeing process for your company’s business loan.

    If you secure an SBA loan, for instance, the SBA requires that anyone with a 20% or greater stake in the business is a part of the guaranteeing process.

    When you sign a limited personal guarantee in this scenario, you’re dividing up some of the debt burden in the case that your business defaults on its loan.

    When compared to an unlimited personal guarantee, it might seem like a limited personal guarantee means less risk for you. But it depends on what you’re signing.

    You’ll want to check if you’re signing a several guarantee or a joint and several guarantee. Under a several guarantee, each guarantor is only held responsible for a portion of the debt.

    If it’s a joint and several guarantee, each guarantor owes a percentage of the liability. But, if for whatever reason one of the guarantors can’t pay their full amount, the other guarantors take on their liability.

    The Difference Between Collateral and Personal Guarantees

    The idea behind collateral and personal guarantees is essentially the same: Lenders are protecting themselves in the event of default.

    But here’s why they mean different things when you use them for secured business loans: Putting up collateral on a loan requires you to stake one or a few particular assets—like a house or a car. A personal guarantee gives creditors the right to seize any and all financial assets that you have now (or even those you’ll obtain down the road).

Types of Secured Business Loans

Now that you know what lenders might ask for, let’s explore the types of secured business loan products out there.

And let’s be clear—almost all loans are secured business loans in some way. That’s why it’s crucial to read through your business loan agreement before you sign on the dotted line. Even if you don’t have to provide collateral, you may find that the lender is putting a lien on your business or requiring a personal guarantee for the financing.

With that said, here are the most common secured business loans that you’ll come across.

Traditional Term Loans

Traditional term loans, or what we sometimes call medium-term loans, are probably the most common secured small business loans.

These small business loans are pretty easy to understand: You borrow a lump sum of money, which you’ll pay back—plus interest—over a set period of time.

While you can get traditional term loans from online lenders, you’ll probably first go to a bank for a medium-term loan.

When you go through a bank to get this kind of financing, they will likely ask you to offer collateral in order to secure the business loan. The type of collateral that you’ll need to put up will depend on the bank you’re working with, your credit rating, and how much capital they’re giving you.

But in most cases, you should be prepared to offer your real estate holdings, vehicles, equipment, savings, and so on for these secured business loans.

    Securing a Term Loan

    Plenty of different types of businesses can secure a term loan—given they have a good credit score, generate a decent amount of revenue, and have been in business for a few years.

    If you’re applying to a term loan from a bank, you can expect a longer application process with many documents required, including:

    • Driver’s license
    • Voided business check
    • Bank statements
    • Balance sheet
    • Profit and loss statements
    • Credit score
    • Business tax returns
    • Personal tax returns

    Term Loan Fast Facts

    Think a traditional term loan is the right kind of secured business loan for you?

    Here are the fast facts on these kinds of business loans:

    Term Loan Amounts

    • In general, traditional term loans have amounts raging from $25,000 to $500,000.

    Term Loan Terms

    • While it varies from lender to lender, traditional term loans generally have terms ranging from one to five years.

    Term Loan Rates

    • Traditional term loans are affordable loan products, with interest rates ranging from about 5% to 25%.

SBA Loans

When it comes to secured business loans, SBA loans are another great financing option for small business owners. The SBA offers term loans through their three loan programs: the 7(a) loan program, the CDC/504 loan program, and the microloan program.

SBA loans aren’t really “loans from the SBA.” They’re actually business loans guaranteed by the SBA.

The SBA acts as a guarantor of term loans, guaranteeing a certain percentage of the loan in an effort to incentivize lenders to fund small businesses. In the end, it’s a win-win situation for the business owner and the lender. Lenders take on less risk, meaning you can get a bigger and less expensive business loan than you’d otherwise qualify for.

But just because the SBA is guaranteeing a percentage of your loan doesn’t mean that you won’t need to secure the loan yourself.

    Securing an SBA Loan

    The government guarantees a large portion of an SBA loan—usually 85%. Because the SBA is guaranteeing most of your loan, you’ll find that SBA loans have less stringent collateral requirements for borrowers to meet.

    But you’ll still need to have some skin in the game, too.

    The SBA works with other lenders to get small businesses the loans they need, and those lenders are typically commercial banks. In the end, you’ll be getting your SBA loan from a commercial bank, so the collateral you need to secure your loan is up to that bank.

    Here are a few types of collateral the SBA and your lender might ask you to put up:

    • Real estate
    • Vehicles
    • Heavy equipment
    • Jewelry
    • Stocks and bonds
    • Mutual funds
    • And more

    In general, the collateral you’ll use to secure your SBA loan will come down to how much that asset is worth.

    And the value of that collateral isn’t based on the market value of the asset—it’s discounted to take into account the value that’s lost if the lender has to liquidate the asset.

    Before you apply for a small business loan from the SBA, it doesn’t hurt to understand the proper valuation methods and processes for determining the value of your collateral. But for most SBA loans—especially ones of larger amounts—you’ll want to get a professional appraisal service to determine the value of your assets.

    Every SBA loan will require some type of collateral. If you don’t have enough collateral to secure one, you’ll need to find a co-signer that can put up the collateral for you.

    SBA Loan Fast Facts:

    SBA loans tend to be one of the best financing products for small business owners.

    Here are some quick facts about SBA loans.

    SBA Loan Amounts

    • The most common SBA loan program, the 7(a) loan program, offers loan amounts up to $5 million.

    SBA Loan Terms

    • Depending on the loan program you’re working with, an SBA loan can have terms of five to 25 years.

    SBA Loan Rates

    • While your SBA loan rate is actually negotiated between you and your SBA lender, you can expect your interest rate of about 4% to 13%, depending on which loan program you choose.

Business Lines of Credit

When you’re on the hunt for secured business loans, you should add business lines of credit to your list of financing options.

A line of credit works similarly to a business credit card: You’re given access to a pool of funds that you can draw from whenever you need or want to. You’ll only pay interest on the money you use, and once you’ve repaid the lender, your line of credit gets refilled to its original amount. This is why a line of credit is also called revolving credit.

When it comes to lines of credit, you can take either the unsecured or secured route. Alternative lenders offer unsecured lines of credit up to $100,000—and come with pretty high APRs.

If you have sufficient collateral to provide—and you’re comfortable offering it—you should consider a secured line of credit.

Putting up collateral on your line of credit allows borrowers with lower revenues and credit scores to get higher credit limits at lower interest rates.

You can secure your line of credit with the following collateral:

  • Personal property
  • Personal guarantee
  • Equipment
  • Invoices
  • Inventory

    Securing a Line of Credit

    Applying for a business line of credit is a fairly straightforward process. With an online lender, you’ll typically have to fill out a short application, and include the following information:

    • Driver’s license
    • Voided business check
    • Bank statements
    • Balance sheet
    • Profit & loss statements
    • Credit score
    • Business tax returns
    • Personal tax returns

    Note that if you go through a bank for your line of credit, you’ll typically have a more lengthy application process. Banks also tend to have higher qualification standards.

    The difference between a line of credit and a term loan is that lines of credit typically come with lower interest rates and closing costs than traditional term loans of similar sizes. However, if you’re late with your payment or go over your credit limit, those interest rates can spike pretty fast.

    If you’re comparing a small business line of credit with a traditional term loan, keep in mind that lines of credit tend to work better for repeated cash flow issues while term loans often make more sense when it comes to specific purchases or one-off business investments. But that doesn’t mean you can’t or shouldn’t use a business line of credit for business purchases, too.

     

    Business Line of Credit Fast Facts:

    If you’re looking for flexible financing with a secured business loan, a business line of credit can be a great option.

    Here are the fast facts:

    Business Line of Credit Amounts

    • Credit lines can range from $10,000 to over $1 million.

    Business Line of Credit Terms

    • While business lines of credit don’t technically have “terms,” they do have repayment schedules set once you draw from your line. This schedule will depend on your credit line lender, but a repayment period on a business line of credit can range from six months to five years.

    Business Line of Credit Rates

    • With a business line of credit, you’ll only pay interest on what you draw from your credit line. These rates can range from 7% to 25%—depending on your eligibility.

Self-Securing Business Loans

If you can gather the collateral you need to get a secured business loan, it’s a good idea to do so: Collateral business loans come attached with some of the lowest interest rates.

But putting up collateral or signing a personal guarantee is risky for you. If you don’t want to put your personal assets on the line, you still have financing options that won’t break the bank: self-securing business loans.

    Equipment Loans

    There comes a time in most business owners’ lives where the next boost of business can only happen if you buy a new, shiny piece of equipment.

    Often times, though, that equipment is hard to pay for out-of-pocket.

    This is where equipment loans come in.

    An equipment loan works just like a car loan. The loan amount depends on the piece of equipment, the price, and whether it’s new or used. Interest rates are usually 8% to 30%, but can be higher if you’re just starting out or have a less-than-stellar credit rating.

    With these types of loans, you don’t have to provide collateral outside of the equipment you’re purchasing with the loan. If your business hits hard times and you default on your loan, the lender will seize the equipment and sell it to recoup their money.

    Invoice Financing

    Invoice financing solves a common—and frustrating—problem for small business owners: You’re waiting on your customers to pay your outstanding invoices, and your cash flow is suffering because of it.

    With invoice financing, you can get the cash you’re owed by your customers right away. The way it works is invoice financing companies will advance you 85% of the value of your outstanding invoices, holding the remaining 15% in reserve. In exchange for advancing you immediate capital, lenders will charge fees on the 15% they’re holding.

    From that 15%, the lender will typically collect a 3% processing fee and a “factor fee” of about 1% each week it takes your customers to pay their invoices. Once your customers pay up, you’ll get the remaining 15% back, minus fees.

    Here’s why invoice financing is a good option for business owners who don’t want to risk their personal assets:

    With invoice financing, you don’t need to put up any of your personal assets as collateral for the loan—your outstanding invoices serve as collateral.

    If your client doesn’t end up paying their invoices, the invoice financing company can only collect up to the initial amount of the outstanding invoice—and your personal assets stay safe.

    Inventory Financing

    If you’re running out of inventory to sell, but you don’t have the money on hand to buy more, you might want to consider inventory financing as a self-securing loan.

    Inventory financing is a type of loan that’s specifically intended for business owners who need to borrow money for inventory.

    Inventory financing can take the form of a term loan, a line of credit, or a short-term loan, but essentially, they all serve the same purpose: You’re advanced a sum of cash that you’ll use to buy inventory. You’ll pay the lender back, plus interest, over time.

    And as you might expect, the inventory you’re buying serves as collateral for your loan.

    So, if your business isn’t able to sell the inventory and pay back the loan with the proceeds, the lender can seize that inventory and liquidate it.

    Inventory financing is a valuable option for business owners who don’t want to put their personal assets on the line. But here’s the caveat: If you can’t sell your inventory to make enough money to pay off your loan, chances are, the lender can’t either. Because of this, lenders might be hesitant to give these secured business loans based on collateralized inventory.

Secured Business Loans: The Top Lenders

There are a few financing options that don’t require any type of guarantee or collateral—like merchant cash advances. While unsecured business loans like these do exist, you have to consider the tradeoffs. Without the assurance that they’ll have some way to recoup their money in the event that you default, lenders will attach sky-high interest rates to unsecured business loans.

These days, almost all small business loans will require some type of collateral or personal guarantee.

And while you might be hesitant to put your assets on the line, the best way to protect yourself from the risk of losing them is to be the best borrower you can be.

If you’re repaying your loan on time and in full, you have nothing to worry about. Once your loan is paid off, your assets will be safely back in your hands.

If you’re seeking a secured business loan, here are some top lenders to consider.

See Your Business Loan Options

    Wells Fargo

    Wells Fargo is one of the best lenders when it comes to term loans.

    They offer short-term loans along with more traditional long-term loans. Plus, they’re a very active SBA lender and are known for being extremely small business-friendly.

     

    Lending Club

    A popular option for long-term term loans is the online lender Lending Club.

    Their loan amounts start at $5,000 and go up to $300,000 on a maximum five-year term.

    To qualify for Lending Club, you need to show the following:

    • Annual sales revenue of at least $50,000
    • At least one year in business
    • A personal FICO score of at least 620
    • No recent bankruptcies or tax lien
    • You must own at least 20% of the business

    Lending Club can approve their long-term loans in one to 30 days after submission, but they’ll charge more than a bank. Interest rates on a Lending Club long-term loan are fixed, but they range from 9.77% to 35.71%.

    BlueVine

    If you’re looking for inventory financing, BlueVine is another lender to consider.

    This funding option with BlueVine goes up to $5 million depending on the value of your unpaid invoices, though applications for more than $250,000 require more paperwork.

    BlueVine will grant you 85% to 90% of your invoice’s value upfront, and you’ll get the remainder when your customer pays the invoice.

    Businesses that have been operating for at least three months, have a personal credit score of 530 or higher, and have annual revenues of $100,000 or more are eligible to apply with BlueVine.

Secured Business Loans: Putting It All Together

You should now be confident to enter the loan market and find the best secured business loan for your needs.

While we’d recommend an SBA or traditional term loan as your first option, it’s worth considering a line of credit or self-securing loan if it makes sense for your business.

Consider all of your secured business loan options, as well as what you want to use the loan for and your business’s qualifications when making this decision. The choice, ultimately, is yours.

See Your Business Loan Options
Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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