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A secured business loan is typically backed by collateral. In other words, you pledge an asset you own, the lender documents a claim against it, and if you miss payments, the asset is used to collect the amount owed.
Since the asset reduces lender risk, secured loans are generally offered at a lower interest rate compared to unsecured loans. Secured loans are also commonly provided with a larger loan amount and longer repayment period than unsecured loans.
After spending over 15 years helping small and midsize business owners secure financing, I've found a few common mistakes they can make when seeking out secured business financing. Either they pledge an asset they can't afford to be without, or they ignore the potential for secured financing and end up paying more than they would have needed to. Both problems can be avoided with a few simple steps.
Below, I cover everything you need to know about secured business loans, from the types of collateral to what you'll need to qualify.
Understanding Secured Business Loans
Each type of loan represents a form of risk to a lender. By offering collateral for a secured loan, you reduce the lender's risk.
When you get a secured small business loan, you pledge an asset. The lender then places a security interest in that asset.
For example, for equipment and inventory, the lender typically makes a Uniform Commercial Code (UCC) filing, where for real estate, a mortgage is filed. The filing provides the lender with a claim to the asset should you fail to make payments. This claim is what allows the lender to cut its risk. And reduced risk is exactly why you receive a better deal on a secured loan.
One feature of this type of financing that tends to surprise people is that lenders don't lend the entire value of your collateral. Instead they offer a percentage of that value. This percentage is known as the advance rate.
Key Terms and Features
These five primary terms come up in virtually all secured loan conversations. Here's what you need to know.
| Term | Definition |
|---|---|
| Collateral | The asset pledged. Examples include real estate, equipment, inventory, accounts receivable or home equity. |
| Advance rate | The percentage of your collateral's value that a lender will lend against. Typically, never 100%. |
| Blanket lien | A claim placed on all your business assets versus one single item. Recorded under the Uniform Commercial Code. |
| Personal guarantee | Your promise to personally repay the loan using personal assets if your business fails. Required on SBA loans from anyone owning 20% or more. |
| Origination fee | An initial fee charged by some lenders to establish the loan. Always ask before you compare rates. |
Types of Secured Business Loans
There's no single type of secured financing. Below are the actual forms of secured financing used by business owners.
SBA loans
Issued as government-backed loans through participating lenders. SBA 7(a) loans provide up to $5 million for working capital purposes, equipment purchases or acquisition and financing of real estate. SBA 504 loans enable financing of major fixed assets such as buildings or land improvements. SBA Microloans provide up to $50,000. Larger loan amounts require collateral. Anyone who owns 20% or more of the business must personally guarantee the loan.
Equipment financing
Cleanest type of secured loan, since the equipment you purchase is the collateral. Equipment financing provides up to 100% financing of equipment purchase values, with repayment terms tied directly to life expectancy of the equipment purchased.
Commercial real estate loans
Commercial real estate loans involve acquiring or refinancing properties, and the property serves as collateral for the loan. Repayment terms on commercial real estate loans are long-term in nature and may extend up to 25 years, reducing monthly repayment burdens and protecting your company's cash flow. Additionally, obtaining a commercial real estate loan requires considerable time due to appraisal requirements and title searches.
Secured lines of credit and term loans
Business lines of credit backed by inventory or accounts receivable provide you with revolving access to credit as needed. Secured term loans provide you with a lump sum amount of borrowed funds secured by either a specific asset or a blanket lien.
Invoice financing
Your outstanding invoices serve as collateral for invoice financing. Invoice factoring converts your receivables into immediate cash, rather than waiting 30 or 60 days for payment from your customers, which applies to companies experiencing slow-paying clients.
HELOC
The only alternative where the asset pledged is personal, specifically equity in your home. See below.
Real Estate Equity as Collateral
A HELOC lets you borrow against the current value of your home minus any remaining mortgage balances. The CFPB defines a HELOC as a method of borrowing money using existing equity within your residence. Similar to revolving credit, you draw against your credit line, repay principal drawn, and redraw again as necessary.
A Clarify Capital HELOC provides you with a credit line maximum of $750,000, beginning at the prime rate (the base rate banks use to price loans) for qualified applicants, which is typically below most unsecured business credit. You may draw against your credit line for up to five years, and repay over up to 30 years. Your house is serving as collateral for this loan. Should you fail to repay, the lender may seek foreclosure on your home.
How Secured Loans Benefit Business Owners
Pledging collateral has consequences. Here is what it provides:
Lower interest rates
Reduced risk from pledging an asset will result in lower interest rates on your secured loan at Clarify. Qualified applicants begin at an APR of 6%.
Greater amounts available
Unsecured lending is restricted based on the applicant's revenues and credit history. Secured lending restricts borrowing capacity solely based on available collateral.
Extended repayment periods
Secured real estate loans may have extended repayment periods in excess of 25 years, so you can spread payments out and protect your working capital.
Another path to approval with lower credit
Although strong collateral doesn't replace a rough credit history, it does give lenders more to consider than your FICO score alone.
Comparing Secured Versus Unsecured Business Loans
Secured and unsecured business loans are two distinct alternatives for financing.
| Feature | Secured | Unsecured |
|---|---|---|
| Collateral | Required | Not required |
| Approval basis | Your collateral plus creditworthiness | Your credit plus annual revenue plus cash flow |
| Interest rates | Generally lower, because the borrower's collateral reduces the lender's risk | Generally higher |
| Loan amounts | Higher, because the loan is dependent upon the collateral's value | Lower, because the loan is based upon revenue |
| Repayment terms | Longer (up to 25 years) | Shorter (six to 36 months) |
| Timing | Slower, since appraisal and lien-filing processes take longer | Faster (as fast as same day) |
Risks and Considerations
There are a couple of important risks to think about when you are considering a secured business loan. I cover each one below.
You could lose your asset. If you default, the lender can seize whatever was pledged to satisfy the defaulted debt.
Personal guarantees remain personal. A personal guarantee stays with you even if the business is what defaults. If selling the pledged assets doesn't cover what's owed, the lender can come after your personal assets. And on SBA loans, anyone who owns more than 20% of the business has to sign one.
Blanket liens may limit future access to financing. A blanket lien creates restrictions on accessing future financing until it has been satisfied, even if a later lender wants to lend against completely different assets.
Default will harm credit scores. Negative credit reports impact future applications for additional financing, including additional business credit cards.
The rule I tell people is don't pledge an asset your business can't afford to lose. If one seizure will ruin your business, consider decreasing your loan request amount, use an alternative collateral source, or explore unsecured options.
Minimum Qualifications
$10,000 in monthly revenue
Your business must earn at least $10K per month in a business bank account.
500+ credit score
You can get approved with any credit score. But the better your credit rating, the better interest rates lenders offer. Your FICO score should be above 500.
Minimum six months in business
Your company should be operational for a minimum of six months. This shows business lenders that your company is sustainable and won't go out of business.
Have a business bank account
Your Clarify advisor will need three or four months of your most recent bank statements to verify income. This is just to see you're actually making $10K+ month in revenue.
Apply for a Secured Loan Today
A secured loan may be a smart option if you have stable assets, a solid plan to pay it back, and enough on the line that waiting for a lower rate is worth it.
Apply today, and Clarify Capital will shop your application around to our network of 75+ lenders to identify available financing that fits your needs.
FAQs About Secured Business Loans
Here are the most common questions I hear about secured business loans.
What Are Secured Business Loans?
Secured business loans are loans that are supported by collateral. You pledge an asset (such as real estate, equipment, or inventory), and if you fail to repay the loan, the lender can proceed with selling that pledged asset to recover the money owed. Since the pledged asset reduces the lender's inherent risk, these loans tend to have lower interest rates, larger loan sizes, and longer repayment periods than unsecured loans.
Can a Business Get a Secured Loan?
As long as you have an acceptable asset for lending purposes, and meet any applicable requirements, yes. Most lenders evaluate business applicants' time in business, average annual revenues, and credit history when evaluating them for a secured loan opportunity.
How Difficult Is It To Get a $1 Million Business Loan?
While more challenging than qualifying for a $100,000 loan, it isn't impossible. At that range, most lenders will expect collateral, several years of positive financial history, clean financial reporting, and ultimately, a personal guarantee. SBA 7(a) loans go up to $5 million, so $1 million falls squarely within their guidelines. Both revenue and credit history matter equally, because no lender will approve $1 million in borrowing capacity against a business that has no capacity to make timely payments.
How Much Is the Monthly Payment for a $100K Business Loan?
That will depend on your term length and rate structure. Below are three different examples representing $100K loans:
6% APR, five-year term: about $1,933 a month
10% APR, five-year term: about $2,125 a month
12% APR, three-year term: about $3,321 a month
In general, shorter-term arrangements produce higher monthly payments but reduced total interest expense over time. Longer-term agreements produce lower monthly payments but increased total interest expenses over time.
Does Clarify Capital Safeguard My Personal Data During the Application Process?
Clarify follows SOC 2 security principles, so the bank statements and tax returns you send stay protected through the review. Checking your options will not affect your credit score, because the lender's first look at your credit is a soft pull, not a hard inquiry.
Michael Baynes
Co-founder, Clarify
Michael has over 15 years of experience in the business finance industry working directly with entrepreneurs. He co-founded Clarify Capital with the mission to cut through the noise in the finance industry by providing fast funding and clear answers. He holds dual degrees in Accounting and Finance from the Kelley School of Business at Indiana University. More about the Clarify team →
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