Find out all about secured business loans, and whether these loans are a good fit for your company’s needs.
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Secured loans, otherwise known as collateralized loans require borrowers to pledge assets as collateral for the loan. Should a borrower default on the loan, the lender may sell off the assets to recover the amount owed. Examples of assets that can be put up as collateral include properties, savings, invoices, inventory, personal assets or a blanket lien.
As collateral offers some security to the lender, secured loans often come with lower interest rates and higher loan amounts. These loans are typically used for large scale investments, including major renovations, equipment purchases and expansion to a new location.
Traditional term loan
With traditional term loans, you’ll borrow a lump sum amount, and make repayments over a set period of time at a fixed interest rate. These loans are typically set to be repaid within a duration of one to three years, and are used to finance a variety of business needs - from hiring new employees, to equipment purchases or expansion projects.
Line of credit
A line of credit, also commonly known as revolving credit provides borrowers with access to a pre-approved sum of capital. Think of it as a credit card; it’s a facility you can draw from as and when you need, and interest is charged only on the amount that is drawn. It’s best suited for covering short term financing needs and recurring expenses.
Merchant cash advance
A merchant cash advance isn’t a loan, but rather, an advance based on your credit card transactions. Through a provider, you’ll obtain an advance payment, which will be repaid with a percentage of your daily or weekly credit card sales. This is a financing option that lends itself to businesses with large credit card sales, such as restaurants and retailers.
As its name suggests, an equipment loan is a financing option that enables businesses to make an equipment purchase. The loan amount, along with interest is to be repaid over a set period of time on a regular installment basis. Once the loan is paid off, the borrower gains ownership of the equipment.
Similar to an equipment loan, inventory financing is a type of self-secured financing, where borrowers aren’t required to put up pre-existing assets to obtain a loan. Instead, the inventory purchased will serve as collateral for the loan, which can take the form of a line of credit, term loan or short term loan.
Borrowers are advanced a sum to purchase inventory, which is paid back with interest. The financing can take the form of a line of credit, short term loan or term loan.
With invoice financing, businesses may obtain financing based on their unpaid invoices. This can be done through two ways: invoice factoring, which refers to an agreement between a business and a third party company (also known as the factor), where the factor purchases the invoices at a reduced price and collects them on behalf of the business.
The second option, invoice discounting, differs from invoice factoring in that the borrower retains control of its sales ledger and collection of payment - rather than selling its invoices to a factor.
Craft a solid business plan
A well-thought-out business plan will demonstrate that you’ve got an action plan for growth in place - one that’s supported by research, product and marketing strategies and data - and provide your lender with a clear notion of where your business is headed.
Here are some tips to craft a business plan that’ll help your application stand out:
Elaborate on current plans and past successes: For small businesses - in particular, newly established ventures - it can be difficult convincing lenders about the long term potential of your business, as it can differ vastly from where you currently are. What can be helpful is to draw attention to your current strategies and past successes. Key questions you’ll need to address include: What growth activities am I implementing right now? What strategies have worked well for my venture recently, and how do I plan to use the funding obtained to further these successes?
Know your numbers: Beyond your financial projections - such as your cash flow, income and sales forecast - you need to be ready to explain about your revenue stream, ongoing expenses (such as rent, utilities and payroll) and financial contribution to your business. Be prepared to dive into the details; for example, if your business experiences seasonal fluctuations, you may be asked about strategies you plan to implement to tide over lull periods.
Prepare more than one repayment strategy: It can be helpful to prepare two to three repayment strategies as a backup plan - just in case your lender disagrees with the initial plan you’ve proposed. Your backup plans may include terms that weren’t part of your original plan, such as the inclusion of collateral for the loan.
Build your online presence
Having a well-managed online presence can go a long way in helping small business owners obtain external financing. Increasingly, lenders are doing a search up on your website, social media sites and business reviews to get a feel of how your venture is doing - rather than solely assessing your application based on factors like your operational history and credit profiles. Here are some action steps you can take to build up your digital presence:
Garner positive reviews: Positive reviews are a sign of good business health - so don’t shy away from getting your customers to leave positive reviews on Google, your social media platforms or website. It can be as simple as asking them to leave a review via an email reminder or push notification; according to a survey by SEO software tool BrightLocal, about 71 percent of consumers indicated that they will leave a review for a business when they’re asked to do so.
Build your thought leadership: Making an effort to connect with other businesses and influencers in your field, getting involved in community events and putting out well-written opinion pieces can help build up your reputation as a thought leader - and convey to lenders that your company is a reputable business and worthwhile investment.
Small businesses and newly established ventures often lack assets to put up as collateral, which puts them at a disadvantage when it comes to obtaining secured loans offered by banks and traditional lenders.
With the rise of online lenders, there now exists a wider range of alternative options - including unsecured financing solutions like short term loans, lines of credit and invoice financing. Offering greater flexibility in lending criterias, streamlined processes and quick access to funding, these lenders can be a viable option for small business owners seeking external financing.