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Updated: February 20th, 2024
If you’re shopping around for small business financing, you’ve likely come across the term “secured loan.” The name can be a bit misleading (especially compared to “unsecured” loans), so we put together a quick-and-easy guide to everything you need to know about secured loans.
We’ll walk you through the ins and outs, how they work, pros and cons, and common types of secured business loans. Let’s jump right into it.
A secured loan (sometimes called collateralized loan) is a type of small business financing that’s ensured by a personal guarantee or piece of collateral. Lenders offer secured loans so that they can recover their losses if you default on your loan by selling your collateralized assets.
Secured loans usually offer lower interest rates and longer terms. Lenders are more likely to lend funds to your business (with favorable terms) because they know they’re going to get their investment back one way or another.
Most business loans are considered secured. When you get something like a long term, you typically have to provide collateral before you’ll get funding. However, if you get equipment financing, your financed equipment serves as the secured collateral. And if you factor your invoices, then your outstanding IOUs serve as secured collateral.
Secured loans require you to provide collateral or a personal guarantee, while unsecured loans do not. But that doesn’t make unsecured loans better than secured loans.
Unsecured loans might not have collateral requirements, but they often carry high interest rates and stringent qualifications. Some lenders even require personal guarantees on unsecured loans.
If you have collateral to secure a business loan, that’s usually the best way to go. Here are a few examples of acceptable collateral:
Secured business loans come in all shapes and sizes. You can find a secured loan for just about any use case. By default, it’s safe to assume that a loan will be secured in some way unless otherwise stated.
Now, let’s explore some of the most common types of secured business loans you’re likely to come across:
Business term loans often provide large funding amounts that necessitate security for the lender. Unless you’re applying for a small term loan or a microloan, you’ll likely have to provide collateral. The type of collateral and its value will depend on your lender, your credit score, and the loan size.
The Small Business Administration (SBA) offers term loans through their three most popular programs: 7(a) loan program, CDC/504 loan program, and microloan program. The SBA doesn’t do the actual lending—they just guarantee a portion of the loans to lower the risk for lenders.
However, most lenders will require collateral or a personal guarantee to secure the loan further and mitigate risk. Again, it all comes down to your lender and the amount of financing you need.
You can use an equipment loan to finance most physical business assets. Here’s just a tiny taste of what you can purchase with equipment financing:
Equipment loans are almost always secured. The equipment that you finance serves as the collateral. For example, if you use an equipment loan to purchase a food truck, the truck will be your collateral for the loan. If you default on your payments, the lender will be able to claim and resell the truck to recoup their funds.
Invoice factoring (also known as accounts receivables financing) lets you trade your IOUs in exchange for immediate cash. You’ll receive up to 90% of the value of the invoices upfront, and then the factoring company will pay you the balance once they receive payment from your client and subtract their factoring fees.
Invoice factoring is a form of self-secured funding. You don’t have to put up any collateral or personal guarantees because your outstanding invoices serve as the collateral.
A line of credit gets your business access to revolving funding that you can draw from whenever you need it. It works a lot like a credit card—you borrow money, pay off the borrowed portion, and get access to the funds again. Plus, you only pay interest on the amount you use, not the entirety of your loan.
Business lines of credit come in both secured and unsecured options. The secured option has lower revenue and credit score requirements and lower interest rates, but you’ll have to provide collateral. If you don’t have collateral available, you can opt for an unsecured line of credit, but these generally have high APRs.
Borrowing money always has risks—regardless of whether you choose a secured or unsecured loan. When it comes to secured loans, here are the advantages and disadvantages to consider.
When it comes to bigger amounts, longer repayment periods, and lower interest rates, we have all the loans you’ll need:
Start your application now to get your business the financing it needs.
Michael Jones is a Senior Editor for Funding Circle, specializing in small business loans. He holds a degree in International Business and Economics from Boston University's Questrom School of Business. Prior to Funding Circle, Michael was the Head of Content for Bond Street, a venture-backed FinTech company specializing in small business loans. He has written extensively about small business loans, entrepreneurship, and marketing.