Secured Business Loans: How Exactly Do They Work?

If you’re looking into taking out a business loan, you might have come across this term: secured business loan.

Don’t worry about the jargon. A secured business loan is just a business loan that’s backed up by something. So instead of watching repayments go down the drain from people who can’t pay back their loans, lenders will secure loans with certain assets.

What kinds of assets are we talking about? It depends. There are three different categories of secured loans available. Let’s take a look.

1. Secured by Collateral

By securing a business loan with collateral—or something you own that can be turned into cash—your lender is lowering their risk. (And hopefully giving you better loan terms as a result.)

The lender can only go after your collateral if you default on your loan, and they’ll only recoup for whatever you haven’t repaid.

What kinds of collateral do lenders look for to secure a loan? Here’s a short list:

• Real estate/property
• Savings
• Equipment
• Vehicles
• Inventory
• Invoices
• Blanket liens

Property might sound a bit scary—if you default on your loan, do you really want to lose your store, office, or house? But remember: The value of the collateral that your lender will seize will be equal to the loan amount you didn’t repay.

In terms of savings, some lenders might like these “cash-secured loans” because the collateral doesn’t need to be liquidated. But you would probably prefer to use another asset as collateral, since your savings as just that—for you to save.

Equipment, vehicles, inventory, and invoices are pretty typical forms of collateral. Lenders just need to liquidate these assets—or sell them off to get their cash values—in order to recover their losses.   

Blanket liens, on the other hand, are a sort of one-size-fits-all collateral agreement. With a blanket lien in place, lenders can seize any assets related to your business that they can sell off to make up for your missed payments.

2. Secured by Personal Guarantee

Instead of using specific collateral, lenders might ask that you offer a personal guarantee to secure your loan.

A personal guarantee makes you the cosigner of the loan—meaning your personal assets get put on the line, not just your business’s. So if you’re unable to repay a business loan, lenders might start seizing your car, your house, your savings account…anything they need to recover their losses.

Just remember: Lenders can only take what they need when you don't repay. As long as you’re a responsible business owner who’s taking on an appropriately-sized loan, you probably won’t have too much to worry about.

Personal guarantees come in two forms: unlimited and limited.

Unlimited personal guarantees are pretty self-explanatory. Lenders will have access to every asset you own, and you’ll be personally responsible for paying back every penny of that loan (plus any legal fees).

This is especially common for sole proprietors. If you’ve got co-owners in the business, however, you might opt for a limited personal guarantee. Instead of giving lenders unlimited access to your personal assets, each owner will only be responsible for a certain dollar amount of their debt. Different lenders have different rules, but for example, the SBA requires that anyone with 20 percent ownership or more needs to sign onto a personal guarantee.

Before you agree to a personal guarantee, make sure to read up on the differences between several and joint and several guarantees. Generally, a several guarantee will make sure each owner is responsible only for their portion of the debt, while a joint and several guarantee holds all owners equally responsible—meaning assets might get seized unequally.

3. “Self-Securing” Loans

Finally, there’s a category of secured loans that we might call “self-securing” or asset-based.

Here’s the general idea: Instead of giving you a loan and agreeing on collateral to keep it secure, a lender will simply base their loan on a piece of collateral in the first place. How much money you get, what your interest rate is—all these factors will depend more on your collateral and less on your business financials and borrowing history.

There are three types: equipment financing, inventory financing, and invoice financing. While they all work slightly differently, the basics are the same. You decide on a bit of collateral—some new equipment you need, inventory you can’t go without, or customer invoices you’ve been waiting on—and submit it to your lender. Depending on the value of that collateral, as well as a few other factors, you’ll get your money and move forward with your business.

Asset-based loans are especially great if there is one specific thing you need those funds for.

The Bottom Line on Secured Business Loans

While you might not love the idea of posting collateral for your business loan, it’s how you get the biggest and most affordable financing. Refusing to offer lenders any collateral will just make your business seem riskier—and you’ll probably receive a smaller, more expensive loan in the end.