There are points that you may require to finance your business. If your needs can be fulfilled with a small amount of money, you are eligible for secured business loans. Still, otherwise, a lender will ask for collateral, and then it becomes a secured business loan.
For instance, if you need money to buy equipment, it will itself be considered collateral. Likewise, if you want to buy land or property or a new building for your office, the asset you purchase will be treated as a security.
How do secured business loans work?
The application procedure for a business secured loan is the same as any other loan. You must go to the lender’s website to apply for the loan and provide all necessary documents. However, you will unlikely get money the same day.
A lender will look over your documents to analyse if your business generates enough money to be able to pay back the debt on time. Your credit history will be viewed to set an interest rate.
You qualify for a lower interest rate if your stellar credit history. The duration of loans and the security offered also plays a paramount role in deciding on the interest rate.
What are the benefits and disadvantages of secured business loans?
Secured business loans seem to be more favourable than unsecured ones as you can get a comparatively lower interest rate deal. Since you are to pay back the debt over time, it seems to be more manageable than other small loans. However, they have some disadvantages.
| Benefits | disadvantages |
| You can borrow more money as you are putting down collateral. | You may lose the collateral if you make a default. |
| You will get more affordable interest rates than unsecured loans. | You will likely wait a bit longer to get the nod. It may not be an ideal source if you need money urgently. |
| No personal guarantee is required if it is secured against commercial property. | You may have difficulty borrowing money if you cannot provide a suitable asset or have a bad credit score. |
How to get the best deal on secured business loans
No lender will sign off on your loan application if your credit history is not stellar. However, some lenders do not mind lending you money despite a poor credit rating, but you will be offered higher interest rates. As you are to pay down the debt over time, you may not find it hard to make monthly payments, but you should still look for ways to get the most suitable deal. Here is what you should do:
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Show increased turnover
Your turnover is essential in convincing your lender to lend you money. Despite good credit history, you will unlikely get approval if your turnover is insufficient to pay back the debt. A lender will look at your business expenses and see if you are left with sufficient money to pay back after settling them.
If your credit report is not impressive at all, you can still avail of a deal at a better interest rate with the help of higher turnover. You will have to prove your repaying capacity so a lender knows that you have sufficient cash coming in every month so you can quickly settle higher debt figures.
To put yourself in a good light, you will need time to brainstorm ways to cut back on your expenses or increase your sales. You should try to focus on both methods to have higher revenues. Consult the accounting department to suss out how you can have more cash coming in. For instance, try to shorten the length of unpaid invoices. Focus on operation overheads. For example, you can downsize your company. You may hire new employees for lower salaries.
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Arrange a guarantor
You should arrange a guarantor if your lender is still not ready to approve your loan. Nonetheless, they must maintain a acceptable credit score. This whittles down the risk of the lender as they can call on the guarantor to pay the debt in case you make a default.
Note that in this scenario, both of you will lose your credit rating, and this may affect your relationship with that person. If anyone gets ready to act as a guarantor, make sure you tell them the consequences they will suffer when you fail to pay your obligations.
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Involve a co-applicant
Arranging a guarantor is not a cinch because most people hesitate to act like a guarantor as it involves a lot of risks. Nobody would skate on thin ice. Your bad credit history leaves an impression that you do not clear your debt.
You should involve a co-applicant with a good credit rating. Both you and your co-applicant will be responsible for the debt. This may help get money at a lower interest rate if the co-applicant has a good credit history.
It is still recommended to boost your credit rating
Though there are some ways to get the best deal on small secured business loans for bad credit, it is still difficult to get approval from a lender. Therefore, you should try to ameliorate your credit score.
- Try to settle all outstanding accounts before you apply for these loans.
- Check your credit report once. If it is still not good, take out a credit builder loan.
- The last debt you took out must be at least six months older at the time of taking out these loans.
The bottom line
Getting a secured business loan is not a cinch, and you must have a good credit history, high turnover, and sufficient collateral to secure against the loan.
If you have a bad credit score, you should try to improve it before you apply for secured business loans. No matter how high turnover you show, the impact of a poor credit score cannot be ignored.