5 Benefits of Secured Loans When Starting a Business
There are many benefits of getting a secured loan to use in your business. Business lending grows increasingly difficult to obtain in today’s economy. You have to show your business records, profit and loss statement and financial projections in a sound business plan. Your credit scores–both personal and business–affect whether your loan is approved. If your credit score isn’t perfect, you will probably pay a higher interest rate if you are approved. Banks and traditional lenders use complex formulas to determine how much money they’ll lend a given company for business expansion.
Using collateral allows you to get the money you want if you have sufficient equity to cover a secured personal loan. You can also qualify for a lower interest rate and a longer repayment period because the lender’s risk is reduced. The Federal Trade Commission recommends that you shop around carefully when using collateral to get the best interest rate and terms according to a report posted at Studentloanhero.com.
Keeping detailed records of your assets and knowing what kinds of property you can use as loan collateral can accelerate the process of using collateral to obtain a loan. Viable assets need a legal title or a sales contract, provenance information (in the case of art and antiques), lien information, current appraisal and other key information.
Why Using a Secured Loan Is Better for Business Financing
Even if you qualify for a traditional business or personal loan, banks often ask for collateral or a co-signer, so getting a secured loan can often bypass the delays and red tape of getting loans from traditional lenders. Businesses often need to respond quickly to market opportunities, and collateral helps to speed approvals and secure lower interest rates. The top five benefits of using collateral to secure a loan to use in your business include the following:
1. A Secured Personal Loan Usually Offers Easier Approvals and Lower Interest Rates
Getting a secured personal loan is easier and faster than obtaining a traditional business loan, and because the loan is guaranteed by your equity in the asset, most lenders offer these loans at lower rates of interest than unsecured loans. There are essentially two types of collateral that you can use: assets that you own outright, and assets in which you have equity but still owe money on a loan. Offering collateral demonstrates several things to potential lenders. First, the availability of collateral shows that you’re a better lending risk. The equity shows that you have valuable resources, and your willingness to risk that equity demonstrates confidence in your ability to repay the loan.
Collateral also opens doors to more attractive loan products and options. You can usually borrow up to about 85 percent of your equity in assets used for collateral according to a report at Articles.bplans.com. The following types of collateral usually qualify for obtaining a secured loan:
- Real estate including homes, land, business property and investment property
- Business equipment
- Mobile homes, recreational vehicles and boats
- Cars, trucks and other vehicles
- Jewelry and watches
- Stocks, bonds and bank accounts
- Golf club memberships
- Antiques, furniture and collectibles
- Insurance policies
- Wine collections
- Coin collections
- Precious metals and other commodities
Real estate is the most common tyope of collateral, but anything of value that can easily be liquidated could qualify according to a report at Sapling.com. You can speed up the approval process by keeping updated records of your assets including a recent appraisal and information on whether the asset is depreciating or appreciating in value. You should also keep information on maintenance history, proof of ownership and the details about any liens against the property. It’s important when putting together your collateral not to overestimate the value because it will take money to liquidate the asset. Most property depreciates in value over time, but some antiques and art grow more valuable.
2. Get Larger Loan Amounts by Offering Collateral
Even if your credit is good, you might not qualify for as much as you need to take advantage of a time-sensitive business opportunity or expand as much as you’d like. Traditional lenders will question your business savvy and ability to repay a loan if you ask for too much money. If you ask for too little, you won’t get the full benefits of borrowing money. According to a report posted at SBA.gov, business loans require detailed financial projections, high credit scores, demonstrated credit history and information about current indebtedness. Your loan might need to fall within a debt-to-income ratio that doesn’t take into account the expanded income that the loan should generate.
Using collateral, you can get a loan based on your equity in the asset. That means you could qualify for larger amounts than most lenders would offer in a business loan or unsecured personal loan. You can also qualify for larger amounts through peer-to-peer lenders and alternative loan products. These lenders often have less strict standards and lower interest rates than traditional lenders offer.
3. Build Your Credit Score by Getting a Collateralized Loan
Using collateral puts your assets at risk if you’re unable to repay the loan, but making your payments on time will strengthen your credit regardless of whether you have a secured or unsecured loan. You can use your assets to build your creditworthiness so that you qualify for unsecured personal loans. Raising your credit score will also help you to qualify for lower interest rates. Rebuilding your credit is a valuable benefit of using collateral.
4. Enjoy Greater Financing Flexibility by Using Collateral
Using collateral offers many business benefits. If you’re starting a business, you don’t need to be currently employed if you can offer sufficient collateral to obtain the funds you need. Your loan amount is limited only by your equity and the asset’s desirability and not by arbitrary lender limits. You can qualify for one of these loans even if you have a low credit score, history of bankruptcy or inexperience in business. Your age doesn’t matter as long as you’re old enough to enter into a legal contract.
If you own valuable property, you can use your equity to improve market liquidity, reduce credit risk and gain access to high-risk/high-reward investment opportunities that don’t qualify for traditional loans. If you trade in the financial markets, you can use collateral to trade in expanded markets. If you have collateral available, you can get financing faster to take advantage of business opportunities with short expiration dates.
5. Greater Options for Landing Secured Loans for Bad Credit
It often seems that having bad credit stops you from enjoying many of life’s advantages such as getting approval for a business or personal loan or even starting your own business, but you can get secured loans for bad credit even if you’ve made a few mistakes. Banks are notoriously strict when it comes to approving business loans according to report posted at Inc.com.
You’ll usually have to submit your business plan and any existing company records and estimate how much money you’ll earn by infusing the capital into your business. You’ll need a SWOT analysis to identify risks and threats. Even if you’re creditworthy and have a sound business plan, most banks will require some kind of guarantee that the loan will be repaid such as collateral, personal guarantees or a co-signer for the loan. However, you can bypass all this bureaucracy with secured loans for bad credit if you have enough equity in real estate, personal property or other valuable assets.
Expanding Business Opportunities by Using Collateral Strategically
Although using collateral expands your business financing options and facilitates getting a secured personal loan at a lower interest rate, there are some disadvantages to this strategy. You could lose your property or home if you can’t afford to make your loan payments. Loans based on collateral often carry variable interest rates, which means your interest rate could rise over the course of the loan according to a report posted at Onlinebankingconsultant.com. Find out more about emerging loan products, alternative lenders and collateralized loans at the Personal Money Store.