Are you a business owner looking for funding? You may have seen the term secured business loan. Financial institutions want to know that they will be repaid by the borrower for the amount that they financed. There are a few categories of these type of loans. Listed are three of the most frequent types currently used by lenders.
Collateral
This loan is backed up by certain assets deemed collateral. Collateral simply means that it is an asset that can be converted to cash. If you default on your loan, your collateral will be taken and the bank will recoup the loan, including legal fees (if applicable). Assets that back a loan vary. Here is a small sample of what would be considered typical collateral applicable to receive a loan:
- Property
- Savings (for a cash-secured loan)
- Equipment
- Vehicle(s)
- Invoices
- Inventory
- Blanket lien(s)
A Blanket Lien is something that the lender can sell (of yours) to make up for missed payments. Some financial institutions want cash-secured loans (savings) because it is already liquidated. Other assets will be converted to cash to cover their losses, such as vehicles, inventory, and equipment.
Loans Secured by Personal Guarantee
You might need to personally guarantee the loan, meaning your personal and business assets are on the line. That includes your car, house, and/or savings account could be taken for the lender to recover their losses.
Also, there are 2 kinds of personally guaranteed loans: limited and unlimited. Limited is when you are only liable for a certain percentage of the business. This applies if you are not the only owner. If you have 20% or more ownership in a firm you must sign a personal guarantee. Each owner is responsible for a certain portion of their debt. Unlimited personal guarantee means that you are on the hook for the entire loan amount, plus any applicable legal fees.
Self-Secured Loans (Asset-based)
Your collateral is the bargaining chip for the loan you want. The lender bases the loan amount on the collateral that is guaranteed. It’s also determined by your business financial status and credit history. There are 3 types of these loans: equipment financing, invoice financing, and inventory financing. A certified appraisal will be necessary to secure funding when the loan is $250,000 or more. Please note that if you do not provide a lender with collateral, your terms may not be as favorable as they could be. The loan provided could be small and have an expensive rate of interest in the long run.
Some of the content in this article was previously posted on the Allbusiness.com website and was written by Meredith Wood.
Photo courtesy of freedigitalimages.net/Vichaya Kiatying–Angsulee
