Whether you’re (finally!) turning your Etsy dreams into reality, you’re tired of the corporate grind and want to head out on your own, or you’re already at the helm of a growing firm, the fact remains that working capital is essential to your business’s success – and frankly, to its survival as well.
This means sooner or later, it’s almost certain that you’ll want to explore business loan options so you can invest in new technology, buy new equipment, hire new talent, expand into new markets, launch marketing campaigns – and the list goes on. The good news is that there are plenty of products on the business loan landscape.
The bad news is that things can get confusing in a hurry. To clear things up and help you make a safe and smart funding decision, let’s look at one of the most popular options: secured business loans.
Now, part of the confusion around the term secured business loans, is that you might think these loans are, well, “more secure” compared unsecured business loans. There’s actually some truth in this, but the added security factor has nothing to do with you, and everything to do with the lender.
That’s because in order to obtain a secured business loan, you need to pledge adequate assets that you own (a.k.a. collateral), which you’ll lose if you default on the loan. Collateral can include physical items such as cars, property, land, equipment and so on, or it can include intangible items like stocks and other securities, mortgages, accounts receivables, and so on.
In exchange for pledging sufficient collateral, a lender will typically offer you a lower interest rate and a longer repayment period than if the loan was unsecured. But what happens if you don’t have enough collateral? Will you still get the business loan you need?
It depends on each lender’s policies. Banks, for instance, only offer secured business loans. However, many firms in the alternative lending marketplace offer secured, unsecured and partially-secured loans. The latter is typically defined as a loan in which the pledged assets are valued at less than 51 percent of the amount borrowed.
You also might be wondering who gets to choose the value of a pledged asset. For example, you may have industrial equipment that, based on your research, is worth $50,000. However, it’s ultimately up to each lender to make their own evaluation. Some lenders are more reasonable and realistic than others. Banks have a well-earned reputation for under-valuing assets, because it further reduces their risk.
Before wrapping up, it’s important for you to understand that lenders don’t want to take ownership of your assets. They want you to pay back your loan per the terms and conditions – and so do you. However, collateral is there “just in case” that doesn’t happen the way it should. Be assured that if you partner with a credible and qualified lender, they’ll do what they can to help you succeed; because when that happens they succeed, too!
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