What Are Secured Business Loans?
Secured business loans, sometimes called collateralized 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 business 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.
Is a secured loan right for your business? We’re here to help you find out.
In this guide, we’ll review everything you need to know about secured business loans—including how they work, what types of secured loans are out there, and where you can apply to the best options.
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How Do Secured Business Loans Work?
As we mentioned, secured business loans are those that require some type of collateral (i.e. backing, anything your business owns that can be turned into cash) to access financing.
Although, as we’ll discuss below, secured loans can take many forms, they’re generally structured as business term loans. In this case, you receive a lump sum of capital from a lender and pay it back, with interest, over a set period of time.
This being said, when it comes down to it, most business loans are secured in some way or another. After all, from the lender’s perspective, providing financing to small businesses is a risky endeavor, especially when working with startups or businesses with bad credit.
Secured loans, therefore, mitigate some of this risk—as you’re giving the lender the right to seize and liquidate specific assets (the collateral you used to secure the loan) in the event you can’t pay.
Secured vs. Unsecured Business Loans
With this information in mind, you might be wondering: What’s the difference between secured loans and unsecured loans?
In short, whereas secured business loans require you to put up collateral to access financing, unsecured business loans don’t.
However, the term “unsecured” here can be a little misleading. Although unsecured loans may not require that you offer up collateral or physical assets, the lender will mitigate their risk in some other way—typically be requiring a personal guarantee or taking out a UCC-lien on your business.
In addition, unsecured loans often have higher interest rates in comparison to secured business loans—again, because secured loans offer greater security for the lender, allowing them to offer you capital at lower rates.
Use our guide to learn more about unsecured business loans.
How to Secure a Business Loan: 7 Different Ways
As we mentioned above, collateral (in some form) is the key to secured business loans, as it decreases the lender’s risk and makes them more willing to offer the capital you need.
So, what can you use to secure a business loan? Here are seven different options:
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, property doesn’t refer only to real estate. You can also offer equipment, cars, motorcycles, boats, etc. as collateral on a business 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 savings account in order to recoup their money.
Additionally, from a lender’s perspective, this is one of the best types of collateral. After all, it’s very low risk for them—if you default on your business loan, 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.
Many small business owners have customers who don’t pay their invoices right away—and suffer cash flow issues because of it.
In this case, 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.
If you need business financing to purchase inventory, you can offer that inventory up as collateral for your loan.
Similar to invoice financing, with inventory financing, the inventory itself acts as collateral—in case you’re not able to sell your products and default on the loan because of it.
Although equipment, as a type of property, can be used to secure a loan—equipment can also secure a loan in a different way.
Similar to both invoice and inventory financing, if you’re looking to finance the purchase of new or used equipment, you can use that equipment itself to serve as collateral on the loan.
Unlike the types of collateral we’ve reviewed thus far, 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 the case of a default.
As the term “blanket” might suggest, a blanket lien is the most comprehensive lien—and the best for the lender. Blanket liens give lenders the ability to take every asset and any form of collateral a business owns in order to get their money back.
This being said, although a lender might use a blanket lien as an additional security measure on a loan you’ve backed with physical collateral, it’s also commonly used by lenders to mitigate the risk associated with an otherwise unsecured business loan.
Similar to a blanket lien, a personal guarantee is a different type of security measure used to back a loan.
In short, a personal guarantee is an agreement with your lender that puts your personal assets on the line—making you (as an individual) the loan’s co-signer.
Therefore, in the case that your business defaults on the loan and can’t pay, 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, etc.
In addition, depending on the lender and type of loan, you may be required to put up collateral as well as sign a personal guarantee.
Types of Secured Business Loans
Now that you know what can be used to secure a loan, let’s explore the types of secured business loan options out there.
And let’s be clear—almost all loans are secured business loans in some way. For this reason, it’s all the more crucial to read through your business loan agreement before you sign and complete the closing process.
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 types of secured business loans that you’ll come across.
Traditional Term Loans
As we mentioned briefly above, traditional term loans, or what we sometimes call medium-term loans, are probably the most common secured small business loans.
Although you can get traditional term loans from online lenders, you might try to apply through a bank first to access the most ideal rates and terms.
When you go through a bank to get this kind of financing, they will more than likely ask you to offer collateral in order to secure the loan. The type and amount of collateral that you’ll need to put up will depend on the bank you’re working with, your credit score, and how much capital you’re applying for.
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.
- In general, traditional term loans have amounts ranging from $25,000 to $500,000.
- Although it varies from lender to lender, traditional term loans generally have terms ranging from one to five years.
- Traditional term loans are affordable loan products, with interest rates ranging from about 5% to 25%.
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
Term Loan Terms
Term Loan Rates
Use our guide to learn more about business term loans.
SBA loans are another great financing option for secured business loans. The SBA offers term loans through three of their most popular loan programs: the 7(a) loan program, the CDC/504 loan program, and the microloan program.
Despite their name, SBA loans aren’t actually issued by the SBA. Instead, they’re partially guaranteed by the SBA and issued by lending partners, like banks and credit unions.
Because the SBA acts as a guarantor of these loans, lenders are incentivized 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.
This being said, like most term loans, every SBA loan will require some form of collateral—whether physical assets or an SBA loan personal guarantee.
- The most common SBA loan program, the 7(a) loan program, offers loan amounts up to $5 million.
- Depending on the loan program you’re working with, an SBA loan can have terms of five to 25 years.
- Although your rate is actually negotiated between you and your SBA lender, you can expect an interest rate of about 4% to 13%, depending on which loan program you choose.
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
SBA Loan Terms
SBA Loan Rates
Learn more about the different SBA loan programs and how they work in our guide.
Business Lines of Credit
When you’re comparing different types of secured business loans, you should look into business lines of credit as a financing option.
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.
When it comes to lines of credit, you can find both unsecured or secured options. Alternative lenders can offer unsecured business lines of credit up to $100,000—these products, however, come with pretty high APRs.
Secured business lines of credit, on the other hand, allow borrowers with lower revenues and credit scores to get higher credit limits at lower interest rates. In this way, lines of credit can be great secured business loans for startups.
- Credit lines can range from $10,000 to over $1 million.
- Although 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 usually, a repayment period on a business line of credit can range from six months to five years.
- 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.
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 worthwhile option.
Here are the fast facts:
Business Line of Credit Amounts
Business Line of Credit Terms
Business Line of Credit Rates
Use our guide to learn more about secured business lines of credit.
As we mentioned above, if you’re looking for capital specifically to purchase equipment, you can explore your options for equipment financing.
Equipment financing is a type of self-securing business loan, where the equipment itself serves as collateral on the loan. With the self-collateralizing nature of equipment financing, therefore, businesses that don’t have other types of collateral to offer can still access the funds they need.
Additionally, equipment financing companies are often willing to work with newer businesses, as well as business owners with lower credit scores. In this way, equipment financing is one of the best types of secured business loans for bad credit and for startups.
- The loan amount depends on the piece of equipment, the price, and whether it’s new or used, but can equal up to 100% of the value of the equipment.
- Typically, the terms on equipment loans span the projected lifetime of the piece of equipment. In general, therefore, the terms are about five or six years.
- Interest rates range from 4% to 40%—startups and businesses with bad credit will be more likely to see rates on the higher end of the spectrum.
Equipment Financing Fast Facts
Overall, equipment loans are fast secured business loans that function very similarly to a consumer car loan.
Here’s what you need to know:
Equipment Financing Amounts
Equipment Financing Terms
Equipment Financing Rates
Use our guide to learn more about equipment financing.
Similar to equipment financing, invoice financing (sometimes called accounts receivable financing) is another type of self-securing funding that’s ideal for businesses that don’t have other collateral to offer up.
Again, with invoice financing, you don’t need to put up any of your personal assets as collateral for the loan—your outstanding invoices themselves serve as collateral.
Plus, because invoice financing companies often evaluate the payment history of your customers in addition to more traditional requirements, this type of funding can be much easier to access—making it a great option for less-qualified businesses.
- Invoice financing companies will typically advance you up to 85% of the value of your outstanding invoices, holding the remaining 15% in reserve.
- Similar to a business line of credit, invoice financing doesn’t have traditional “terms.” Instead, the time it takes you to receive the remaining 15% the financing company has in reserve depends on when your customers pay their invoices.
- From the 15% held in reserve, the lender will usually collect a 3% processing fee and a “factor fee” of about 1% for each week it takes your customers to pay their invoices. Once your customers pay, you’ll get the remaining 15% back, minus fees.
Invoice Financing Fast Facts
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.
Here are the fast facts:
Invoice Financing Amounts
Invoice Financing Terms
Invoice Financing Rates
Use our guide to learn more about invoice financing.
Finally, one of the last types of secured business loans is inventory financing. Like both invoice and equipment financing, inventory financing is a self-securing loan.
This being said, however, inventory financing can take many forms—a medium-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.
Then, of course, you pay the lender back, plus interest, over time with the inventory itself serving as collateral on the loan.
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.
- Similar to commercial real estate loans, you might not always get a loan that’s equal to the total liquidation value of your inventory. Instead, a lender might offer you 50% to 80% of the inventory’s value.
- Because inventory financing can vary in form, you’ll see a range of term lengths. Generally, however, because the intent is to sell the inventory you purchase, and quickly, it’s unlikely to see a term longer than three years.
- Interest rates can also range significantly—based on the type of financing, the lender, and of course, your business’s qualifications. Overall, it’s likely that you’ll see rates starting around 8% to 10%. For short-term, faster products, you’re more likely to see higher rates. Newer businesses and those with bad credit are more likely to face higher rates as well.
Inventory Financing Fast Facts
As we mentioned, inventory financing can come in many forms. Here’s what you need to know about this type of secured business loan:
Inventory Financing Amounts
Inventory Financing Terms
Inventory Financing Rates
Use our guide to learn more about inventory financing.
Best Lenders for Secured Business Loans
When it comes down to it, there are a few financing options that don’t require any type of guarantee or collateral—like merchant cash advances. Although 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 extremely high-interest rates to unsecured business loans.
Therefore, even though 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 a responsible borrower—only taking debt you think you can afford, paying on-time and in-full, and communicating proactively with your lender about any issues.
This being said, then, if you’re looking for the best secured loan for your business, here are some top lenders to consider.
- Annual sales revenue of at least $100,000
- At least one year in business
- A personal FICO score of at least 600
Best for bank lending.
In terms of small business-friendly banks, Wells Fargo is one of the best options.
With Wells Fargo, you’ll find options for short-term loans, long-term loans, SBA loans, as well as equipment financing.
Learn more about Wells Fargo business loans.
Best for short-term loans and lines of credit.
A popular option for both short-term loans and lines of credit is the online lender OnDeck.
Their loan amounts start at $5,000 and go up to $500,000 on a maximum three-year term. For lines of credit, you’ll have a maximum of $100,000 with a one-year term.
To qualify for financing from OnDeck, you’ll need:
OnDeck can approve applications as fast as the same day you apply. These fast secured business loans, however, will have higher interest rates than bank loans or some other, longer-term products. Rates typically range from 9.99% to 99%.
Best for invoice financing.
If you’re looking for invoice financing, BlueVine is a top lender to consider.
This funding option with BlueVine goes up to $5 million depending on the value of your unpaid invoices.
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.
Frequently Asked Questions
The Bottom Line
At the end of the day, if you’re looking for financing, you’re more than likely going to be comparing your best options for secured business loans.
While an SBA or traditional term loan will be the most ideal choice—with long terms and low interest rates—they also can be slow to fund and difficult to qualify for.
Therefore, businesses that need faster funding, as well as startups and those with bad credit might consider options such as lines of credit or self-securing financing, like invoice, inventory, and equipment financing.
Ultimately, it’s important to remember that the right secured loan for your business is not only one that you qualify for, but also one that you can actually afford.
To this point, before agreeing to any form of financing, you’ll want to understand the true cost of the debt and ensure that you’ll be able to abide by the payment schedule—that way, you don’t have to worry about losing any of the collateral you have on the line.