A secured business loan works by backing the loan with collateral. Collateral can be a piece of property, equipment or any other type of business asset. If your business defaults on the loan, your lender will seize the collateral to cover the outstanding principal and interest.
Secured business loans are one of the most common types of business financing. That’s because lenders see a secured loan as less risky than an unsecured loan — they ensure repayment, even if the business fails. You can find this type of financing through most lenders, including banks, credit unions and online financial technology (fintech) lenders.
Less risk for the lender typically means a better deal for you. A secured loan often comes with lower rates and fees than an unsecured loan. Backing your loan with collateral can also help your business receive a large loan amount or qualify with less-than-stellar credit.
Collateral you may be able to use on a secured business loan include:
In some cases, a lender will place a blanket lien on business assets, rather than requiring you to back it with specific collateral. This allows the lender to seize any asset if a business defaults on a loan. Blanket liens are especially common with fintech lenders.
You can also use personal assets like your home, vehicle or stocks as collateral. But your state may have restrictions on the type of assets you can use — especially when it comes to assets with fluctuating value, like home equity.
If you don’t have any assets at all, you might need to consider an unsecured business loan. Unsecured business loans don’t require a specific asset, but tend to have stricter eligibility criteria and may still require a personal guarantee.
How much collateral is needed for a business loan?
A personal guarantee is similar to collateral, but they’re not the same thing. A personal guarantee is when business owners agree to pay off the loan if the business is unable to meet the debt obligation.
It sounds similar to collateral, but the key thing to remember is that personal guarantees mean the business owners can repay the debts however they wish. With collateral, the asset is what’s used to repay debt.
There are numerous types of business loans. Here are five common types of secured financing options, each crafted for different needs.
| Type of financing | How it works |
|---|---|
| Equipment and vehicle loans | Equipment and vehicle loans work very similar to a traditional auto loan. Typically, you can finance around 80% of the purchase price. The equipment acts as collateral while you repay the loan in installments. |
| SBA loans | An SBA loan is a government-backed loan for small businesses that don’t qualify for traditional financing. Many SBA loans require collateral, but it can depend on the type of SBA loan, and how much you borrow. |
| Inventory financing | Inventory financing providers offer funds to purchase inventory, which it then uses as collateral. This is particularly useful for seasonal businesses but can’t be used for perishable inventory, like produce. |
| Terms loans | Terms loans are a lump sum that your business borrows and then repays in installments. They don’t require a specific type of asset as collateral and in some cases may only require a blanket lien on assets. |
| Invoice financing | Invoice financing is a short-term loan for business-facing business that uses accounts receivables as collateral. |
| Business lines of credit | A line of credit works similarly to a credit card, but with the ability to withdraw larger amounts in cash. Secured lines of credit typically require collateral with value that covers the maximum borrowing limit. |
| Business acquisition loans | A range of financing options backed by your new company’s assets, used to fund the cost of the acquisition. |
To qualify for a secured business loan, businesses typically need to meet the following requirements — at a minimum:
Secured loans may have higher acceptance rates and lower APRs than an unsecured loan. But they’re not without their downsides.
A secured loan can be great for a business looking to expand or get some new equipment. But it comes with significant risk — if things go south, the collateral is on the chopping block.
If a secured loan isn’t what you’re looking for, here are some alternatives to consider:
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