Home Finance How Does a Secured Business Loan Work?

How Does a Secured Business Loan Work?

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Are you a business owner looking for a business loan? Then, you should know about a secured business loan.

A secured business loan is a business loan that is secured by something, may be land, equipment or a property. As the name suggests, the loan has security which backs up the funding. Instead of seeing their funds go down the drain from defaulting borrowers, lenders secure the loans with specific assets. A Secured business loan is an important part of every business.

How Does a Secured Business Loan Work

The biggest advantage of the loan is a low-interest rate and longer tenure. Since the loan amount is secured with an asset, the lender will be happy to offer a lower interest rate on your loan. Typically, the loan amount will depend on the value of your collateral. You need to remember that the entire cost of the collateral will not be the loan amount. Your lender will hire a market valuer to estimate the value of a property or equipment and will decide on the loan amount. The process of valuation varies from one lender to another and also depends on the type of collateral.

Do all types of assets work in a secured business loan? It depends. Here are the different types of collaterals you can use for a secured business loan in India.

1. Collateral

This is the most common form of secured loan. Collateral is something you own which can be liquidated into cash within no time. It reduces the risk of the lender and will give you better terms on the loan. Your lender will only go after your collateral in case of your default in the loan. If you stop making repayments, the lender will have to make up for whatever you have not paid. You can use your savings, real estate, equipment, invoices, vehicles, blanket liens and inventory as collateral.

• Property: Loan against property is a very common form of business loan. However, if you default on the loan, you could lose your house, office or a store. The value of the asset which your lender will seize is equal to the amount you did not pay. You can use an idle property or a property that is leased out, you can use any commercial or residential property for the loan. However, the property should be under your name and you should have a clear title of ownership. In case of joint owners, they will become co-applicants to the loan.

• Savings: There are lenders who like cash secured loans since they do not need to liquidate collateral. They can get immediate access to funds in case you default. Since your savings are just for you, it is advisable to use a different asset as collateral and not put up your savings. This includes your fixed deposit, unit-linked insurance plans, non-term life insurance, government bonds, and national savings certificate.

• Vehicles, equipment, invoices, and inventory: These are pretty common types of collateral for small and medium businesses. Lenders find it easy to sell these assets and get cash for the same. It helps them recover the losses and these assets are easy to sell. The loan amount will depend on the value of the collateral. Hence, you will have to consider the amount you intend to borrow and then decide on the asset you want to use for the purpose of borrowing.

• Blanket liens: This is a collateral agreement where the lender will seize any business-related asset that they can liquidate in order to make up for the default in repayments.

2. Personal guarantee

An alternative to collateral is a personal guarantee which helps secure the loan. When you agree for a personal guarantee, you become the cosigner of the loan. This basically means that your personal assets will be put on the line and not only your business assets. In case you are unable to make timely repayment of the business loan, the lender might start with seizing your car and then your house and your bank account. You need to be very careful when you agree for a personal guarantee on a loan. It carries the risk of losing your personal assets. Lenders will only take your personal assets when you do not repay. If you are a responsible business owner who takes on an appropriate amount of loan, there is not much you need to worry about.

3. Loans backed by a purchase

If you have applied for any business loan like : hdfc business loan, sbi business loan then because you want to purchase equipment or a new office, you can use the same asset as collateral. This means the asset will be your collateral and you will also get funds against the same. This is the easiest way of getting a loan for the purchase of an asset. However, in this case, the loan amount will depend on the value of the asset you are buying.

While you might not be excited about the idea of posting collateral for your loan, it is how you get the most affordable financing for your business. When you refuse to offer a collateral to the lenders, your business will seem riskier and you will receive an expensive loan in the end. Collateral not only makes it easier for you to get access to funds but will also ensure that you get the loan at friendly terms of repayment.

The most important thing in any loan is the timely payment of dues. If you default, you could end up losing your valued assets to the lender. The lender will not sell your asset immediately as you default but he will take the necessary steps if the default continues. If you default for one month and have a reason for the same, the lender will not sell your property. However, if there is consistent default and the lender is of the opinion that you might not be able to make the repayment on time, he could take steps to sell the property in order to recover the outstanding funds.

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