Success is not always achieved with new business ventures and about half of small businesses fail within five years. One of the most often cited reasons for this failure is a lack of capital.
It takes money to start a business and keep it going until it begins to make money on its own. You saved what you thought was an adequate amount before launching your business but now you see that you’ll need more. What do you do?
A business loan is a good option if you feel that your business is going well and is worth the risk. But lenders are wary since business loans tend to have a high default rate.
This is where a secured business loan comes in handy. Let’s take a look at what it is and how to get one.
Many loans are backed by only your word that you’ll pay them back. That’s why lenders scour your financial records and credit report to see how trustworthy you might be before handing over the money.
For business loans, it can be even more difficult. The lender knows that your ability to pay back the loan is usually linked to the success of your business. And businesses are inherently risky.
A secured loan gives your lender more confidence. This means that you offer up an asset as collateral for the loan. If you default, the lender has the right to take the asset and sell it to recoup their investment.
The asset can be something that you’re buying with the loan. For example, you can get an equipment loan to purchase equipment for your business. If you default, the lender has the right to seize the equipment.
Real estate is an excellent choice to offer as collateral. Whereas the value of equipment can decrease with use or age, the value of real estate usually either stays steady or increases. This makes real estate a quality asset to offer and you can qualify for lower interest rates and better terms as a result.
You can offer a property that you already own as collateral or you can use the loan to purchase a piece of commercial property that will become its own collateral.
Regardless, using real estate to back your loan will save you thousands of dollars over taking out a conventional business loan. It can also make you eligible for a loan when you would otherwise not be.
What if you have poor credit? Lenders are understandably wary to approve your loan when your track record isn’t stellar. Offering up a piece of real estate as collateral is the perfect way to assuage their fears.
Additionally, you will qualify for a higher loan amount and many lenders offer longer repayment periods as well.
A secured business loan works basically like any other type of loan. The lender will review your paperwork and decide whether to lend you the money. Offering collateral makes it far more likely they will approve your application. Plus, they will often offer much more favorable terms in exchange.
However, there are a couple of things to be aware of. Loan-to-Value is an important one.
The real estate you offer may be worth $200,000, but the lender will not lend you 100% of its value. All lenders have what is called a loan-to-value (LTV) ratio.
If the lender offers you a 75% LTV ratio, this means you qualify to borrow $150,000. If you need to borrow more, you’ll need to make your collateral more valuable, such as by adding another asset.
While it’s rare that real estate prices drop drastically, there is some variance. This gives the lender a buffer in case they can’t sell it for the full $200,000. Plus, there will be various costs associated with selling the property that they must compensate for.
A secured business loan offers businesses an option for getting the money they need to expand their business. It can also save the business a tremendous amount of money.
Consider this recent transaction that we did. A trucking company used a loan from us to pay off four open cash advances. We were able to lower the daily payment by over two-thirds, freeing up needed cash flow for the business.
Whether this option is right for you will depend on your specific situation.
Ready to apply? Here at Jeremy McCay Services, Inc., we are in the business of helping businesses grow and flourish.
A secured business loan may be just what you need to propel your business forward.
We’ll help you get there.