When it comes to securing financing for your small business, secured business loans may offer a reliable option. These loans utilize collateral to provide lenders with security, which could make them more accessible for businesses with limited credit history or lower credit scores.

Let’s delve into the ins and outs of secured business loans, covering everything from how they work to the types of financing available and the qualification requirements you need to meet.

What is a Secured Business Loan?

A secured business loan is a type of financing in which you, as the borrower, pledge assets as collateral to secure the loan.

These assets could include property, equipment, inventory, or accounts receivable. By providing collateral, you reduce the lender’s risk, typically making it easier to qualify for the loan.

However, it’s important to understand that defaulting on the loan could result in the loss of the pledged assets.

Parts of a Secured Business Loan

Secured business loans consist of various components that impact the size of the loan, how much you pay, and expenses you’re allowed to use the business loan for. Understanding how these parts of a secured business loan work can help you decide whether this is the right type of financing for your small business.

Here are some of the most important components of a secured business loan:

• Interest Rate: This refers to the percentage charged by the lender on the principal amount, which is the initial amount borrowed. The interest rate is essentially the cost of borrowing the money and can be fixed or variable, depending on the loan type and lender.
• Loan Term: The loan term indicates the duration within which the borrowed amount must be repaid in full. It’s often expressed in months or years.
• Collateral: Collateral is any asset that the borrower pledges as security for the loan. The lender will determine what types of collateral they accept, but many allow property or a home to be used as collateral. Without collateral, lenders rely more heavily on the borrower’s creditworthiness.
• Repayment: Repayment involves returning the borrowed funds to the lender according to the agreed-upon terms, which usually include periodic installments comprising both principal and interest. If you get a fixed rate secured business loan, then monthly payments will remain consistent throughout the life of the loan.
• Uses: Secured business loans can serve various purposes, including working capital needs, purchasing inventory, expanding operations, or investing in marketing initiatives. With most lenders, they offer flexibility in funding without the necessity of specifying the loan’s purpose. Make sure that the lender you choose lets you use the funds as planned as some lenders set restrictions on acceptable uses.

Secured vs Unsecured Business Loans

Comparing secured and unsecured business loans might help you determine the best option for your business needs. Here’s a breakdown of their differences:

As mentioned before, secured business loans use collateral to secure the loan, which can allow lenders to accept borrowers with lower credit scores. While specifics vary by lender, secured business loans:

• Require collateral.
• Typically have lower interest rates.
• Come with longer terms than unsecured loans.
• Allow for larger loan amounts than unsecured loans.
• Are suitable for businesses with valuable assets.

Unlike secured business loans, unsecured business loans require no collateral, making them ideal for small businesses with few assets but strong credit. Unsecured business loans:

• Do not require collateral.
• Generally have higher interest rates than secured business loans.
• Often come with shorter loan terms than secured business loans.
• Require strong personal and business credit scores.
• May require stricter business income levels for approval.
• Are suitable for businesses without significant assets or those unwilling to pledge collateral.

Why Consider a Secured Business Loan?

Secured business loans are particularly beneficial for businesses that may not qualify for unsecured loans due to limited credit history or lower credit scores. They can offer advantages such as lower interest rates, higher borrowing limits, and longer repayment terms.

Secured business loans can also be an excellent way to build business credit, assuming the borrower makes payments on time and in full.

Before applying for a secured business loan, it is essential to weigh these benefits against the potential drawbacks, including the risk of losing collateral in case of default.

Benefits of Secured Business Loans

One key benefit of secured business loans is the lower interest rates compared to unsecured loans that typically comes with them. This means lower repayments than a similar loan with a higher rate, leaving more money left over for operations and growth.

Secured business loans also do not typically require strong credit histories and scores as the collateral makes the loan a safer option for lenders.

Secured loans often have higher borrowing limits than unsecured loans, allowing businesses to access larger amounts of capital. The longer repayment terms typically offered by secured loans may also give businesses greater flexibility in managing their cash flow.

Drawbacks of Secured Business Loans

Despite their advantages, secured business loans also have drawbacks. The most significant risk is the potential loss of collateral if the borrower defaults on the loan.

The application process for secured loans may be more time-consuming than for unsecured loans, and businesses with insufficient collateral could struggle to qualify for the financing they need. Keep in mind that collateral used for a secured business loan needs to get appraised, too, another step that adds time to the application process.

Types of Secured Business Loans

Secured business loans come in various forms, each tailored to meet different business needs. Here’s a brief overview of the types of financing available:

Term Loans

Term loans are a common form of business financing where a lump sum of money is borrowed and repaid over a set period, typically with fixed monthly payments and fixed interest rate.

These loans are generally ideal for long-term investments such as purchasing equipment, expanding operations, or funding significant projects. Terms loans offer predictability and stability, great for business owners that want consistency.

SBA Loans

SBA (Small Business Administration) loans are government-backed and designed to support small businesses. They provide favorable terms and lower interest rates than traditional loans, making them an attractive option for business owners who may not qualify for conventional financing.

SBA loans come in various forms, including 7(a) loans, CDC/504 loans, and microloans, each tailored to different business needs.

Secured Business Loan Alternatives

Line of Credit

Similar to a credit card, a line of credit allows you to borrow up to a predetermined limit as needed. You only pay interest on the amount you use, making it an ideal option for managing cash flow fluctuations, covering unexpected expenses, or seizing growth opportunities. The flexibility of a line of credit makes it a popular option for small business financing.

Lines of credit may be secured by collateral, such as inventory or equipment, depending on the lender.

Invoice Factoring

Invoice factoring involves selling your accounts receivable to a third-party company, known as a factor, at a discount. In return, you quickly receive cash, which could be crucial for businesses with slow-paying customers or seasonal fluctuations in cash flow. While it may be more expensive than traditional loans, invoice factoring could provide quick access to capital without taking on additional debt.

Equipment Financing

Equipment financing allows businesses to purchase or lease equipment without a substantial upfront investment. This type of financing uses the equipment itself as collateral, reducing the lender’s risk. Terms and interest rates may vary based on factors like equipment type and your creditworthiness. Whether you need machinery, vehicles, or technology, equipment financing could provide a cost-effective way to acquire essential assets while preserving your working capital.

Secured Business Loan Qualification Requirements

To qualify for a secured business loan, you’ll typically need to meet certain requirements, including:

• Time in business
• Collateral
• Good business credit score
• Good personal credit score
• A history of business operations
• Sufficient revenue to repay the loan

Keep in mind that lenders set their own requirements, and some may set stricter requirements than others. In some instances, you may be required to submit additional information, such as tax information or a business plan.

Secured Business Loan FAQs

How much collateral is needed for a secured business loan?

The amount of collateral required for a secured business loan could be different depending on factors such as the loan amount, the lender’s policies, and the type of collateral offered. Generally, lenders will determine the value of the collateral relative to the loan amount to determine adequacy.

Is a secured business loan hard to get?

Secured business loans may be easier to qualify for compared to unsecured loans since the collateral reduces the lender’s risk. However, meeting the qualification requirements, including providing sufficient collateral and demonstrating the ability to repay the loan, is essential.

How long does it take to get a secured business loan?

The time it takes to get a secured business loan may vary depending on factors such as the lender’s processing time, the application process, and the amount of required documentation. In general, the process may take several weeks to complete, from application to funding.

Applying for a small business loan can be a tricky process, as there are several requirements you need to meet in order to obtain one. Those requirements can be confusing, as lenders require everything from business licenses and cash flow history to business plans and personal financial statements. 

Whether you are applying for a business loan from a traditional bank, alternative lender, or credit union,  as a small business owner in need of financing, one of the ways you can untangle the process is to use the following small business loan checklist.  This checklist will help to ensure that you are ready to apply with confidence. Knowing what documents are needed for a business loan ahead of time will keep you organized and possibly help you get a reasonable interest rate on your loan. 

Things to Consider Before Applying for a Business Loan

Before even beginning to collect your business loan paperwork,  there are key factors you should consider:

Why do I need a loan?

This is perhaps the most important question you should ask yourself before applying for a small business loan. Getting a business loan just to have the money you borrowed sit around while you pay interest on it is obviously a bad idea. 

• Ideally, the proceeds of a business loan should be used towards growing your business so that it can increase its revenue. For example, if you need money to develop and market a new product; purchase or upgrade equipment; expand your business by hiring new employees; or adding to your inventory would all be ideal reasons to obtain a loan. 
• There are also financing products, such as working capital loans and business lines of credit, that can help your business operate during the offseason or when there’s a downturn in the economy. 

Can I afford a loan?

Everyone knows that loans carry interest rates, and those rates are, in part, affected by the current interest rate environment. The Federal Reserve has raised interest rates 10 times in the past year-and-a-half, and that’s going to make the interest rate on virtually every type of business loan you want to take out more expensive. If you can afford to wait, you might want to hold off on getting a business loan until rates drop again. 

What type of lender suits me best?

There are several types of lenders who can provide you with a small business loan. Those include traditional banks, alternative lenders, trade unions, marketplaces, and brokers. Each one comes with pros and cons that you should consider carefully. Some lenders, such as traditional banks and alternative lenders, offer financing products directly, while brokers typically offer you a marketplace of lenders. Also, some will demand higher business and personal credit scores than others, and some can deliver your funds more quickly than others. Carefully consider which one best serves your needs.

Can I get a grant instead?

There are, of course, several public and private business grants available to small businesses – some of which are backed by the US SBA. These grants often have specific criteria for applying. For example, some may be offered to small businesses in certain industries, and others may be offered only to women- and minority-owned businesses. Determine whether you qualify, but remember, applying for these can be a roll of the dice and you’re not guaranteed to win a grant. 

Do I have a plan B?

All small business owners have the best of intentions when applying for a business loan, but life happens, and sometimes it won’t go your way. Before you take out a loan, it’s a good idea to make a contingency plan if things go south and you find yourself struggling to keep up with debt payments. Bankruptcy should be a last resort. Do you have assets you can sell? Do you have a cash reserve that you can draw upon until you get back on your feet? 

Small Business Loan Documents Checklist

Go over this business loan documents list to make sure you are prepared for the sometimes overwhelming process of applying for a business loan. Doing so will simplify and hasten the process of getting the funding you need for your small business. 

Check your credit scores  

All lenders will pull both your personal and business credit reports. You can check your personal FICO scores online for free at the websites of the three main credit bureaus, Transunion, Experian and Equifax. You may have to pay a fee to get detailed reports so that you can check for errors. You can check your business credit score at the website of Dun & Bradstreet, the business credit bureau that is most heavily favored by lenders, for a small fee. 

If your personal FICO and business credit scores are less-than-stellar, you may want to consider taking 6-9 months to improve them so that you can increase your chances of being approved and get a better rate on your loan.

Prove that your business exists

All lenders will require documentation proving that your small business is registered as a tax entity. At the very least they will require your employee identification number, which is issued by the IRS, and proof that your business is registered as a LLC, “Doing Business As” (DBA) company, or an S or C corporation. Lenders will also require proof of identity, pay stubs, and your social security number as well. For an SBA 7a loan or a term loan from a traditional bank, the lists of documents required can be even longer and include items such as business licenses, business lease agreements, proof of equity injection and franchise, and licensing agreements if you plan to franchise your business.

Have a business plan

If you plan to apply for a term loan with a traditional bank or for a SBA 7a loan, chances are you will need to show your business plan. This is a plan that shows how your business is organized and typically includes a market analysis and what niche your products and services fill, how they differ from your competitors, and why you believe your small business will be successful going forward. In short, it details why you believe your business is going to make money.

Financial Statements

Almost all types of lenders will want to see your business’s financial documents that indicate it has a strong cash flow history, including, but not limited to 3-6 months’ worth of business bank statements, 2-3 years of tax returns, balance sheet statements and income statements. 

Run a cash flow analysis

Cash flow is one of the primary indicators that lenders use to understand the health of your business. Being able to show 3 to 6 months of positive cash flow can increase your chances of approval. It can even get you better financing terms for your small business loan. 

Collect your business bank statements 

Your business accounts are another good indicator of your company’s financial health. Generally, lenders want to see a positive daily balance on your bank statements for the past 3 to 6 months. 

Gather  supporting documents for unusually large deposits

Unusually large deposits can act as a red flag for lenders. While the  presence of these deposits can delay finalization of loans, they are not necessarily bad. Many businesses understandably have large swings in deposits and credits to their account. If your business is like that, you can expedite your loan application process gathering copies of your account receivables and future contracts to support these large deposits.

Take care of delinquencies

Many lenders only want to lend to people whom they believe are of high character. This is especially true when you’re applying for SBA loans. As such, if you have any tax liens or are late on child support payments, you should take the necessary steps to clear those up before you apply. 

Resolve any open tax liens

Unresolved open tax liens can hurt your ability to obtain financing. If possible, try to get a payment plan set up on any open tax liens you may have before you apply for a loan. A payment plan on a tax lien, along with a very strong positive cash flow will typically be considered by alternative lenders and even some SBA lenders for loan approval 

Assess any collateral you may have

Before you apply for a loan package, you may want to sit down with a business loan specialist or an accountant to see if you need to put up collateral. This includes real estate, investment holdings, savings and even your car or valuable pieces of equipment you may own. Traditional banks often want collateral if your business credit or personal FICO score is shaky. In rare cases, alternative lenders may ask for collateral. Even if you have good credit, it might be worth applying for a secured bank loan or business line of credit because you may be able to notch a lower interest rate and a higher credit line or loan amount if you put up collateral. 

Get trade references

If your business credit score is borderline, you can boost it by getting positive references from either your suppliers or, if you lease a physical space, your landlord. You can give these references to your credit bureaus and, if you’re using a traditional bank, to the loan officer. Having these could mean the difference between obtaining a loan or getting rejected. 

If you get Rejected

Getting rejected for a business loan isn’t pleasant, but it can be a valuable lesson on how to get accepted the next time you apply. Traditional banks and alternative lenders want to grant you a loan approval because it’s the way they make money. As such, they will be happy to give you a detailed explanation for why you were denied, and, usually, it will take a bit of time to improve your business to the point where you can obtain that business loan.

While every rejection is different, some of the most common reasons for getting rejected for a business loan are:

Your business credit score is not high enough

Some of the ways you can raise your business credit score include:

•  reducing the number of creditors you owe money to
• making sure you make debt payments on time for at least 6-9 months
• having a strong credit mix. 

Other steps include being in good standing with your suppliers and increasing the assets of your business. 

Insufficient time in business 

Traditional banks typically won’t lend to a small business that hasn’t existed for at least three years, while alternative lenders may want to see at least two years in business. If this is the case, hold off on borrowing until your small business has been in operation for a sufficient time. If you can’t wait, see if you qualify for an SBA CDC/504 or SBA microloan, both of which only require 6 months in business. 

Too much existing debt

This is actually a common reason why small businesses get turned down for a loan. If you already have outstanding loans, you can always try to retire them with a new loan. Additionally, if you have a line of credit that is close to being fully drawn, you should take steps to pay it down before applying for a new loan. 

Your cash flow is not strong enough

If your small business’s cash flow is tight (meaning you are spending almost as much money as you are taking in), take steps to fix it by finding ways to reduce your expenditures. 

Your industry is too risky

If your small business operates in an industry in which there are higher than average bankruptcies, or if it operates in what lenders may consider “vice” industries such as gambling, alcohol, or legal marijuana dispensaries, you will most likely get turned down no matter how financially strong your business is. A quick Google search, however, can most likely lead you to legitimate online lenders who specialize in lending to companies in your industry.

Don’t Get Frustrated

Remember, when applying for a business loan, patience and weighing the pros and cons of different lenders are often the keys to getting the funding that you need to help your business grow. Go down the checklist of items that you need to take care of in order to be ready to apply, and carefully consider the pros and cons of the different types of lenders out there so that you can get the financing that is exactly right for your business. 

Life is a process of trials and errors, and there’s probably no one for whom that statement rings more true than a small business owner. This statement especially applies when small business owners apply for loans to gain much-needed capital to ensure their businesses grow or to smooth out their cash flows. What if, however, a lender denies your application for a small business loan, even though you thought you took all the necessary steps to obtain that financing? 

First thing’s first: while getting a business loan rejection is frustrating and disheartening, you need to keep a positive mindset. If your business loan was declined, don’t look at it as a failure, look at it as one of the many lessons you will learn as you run your business. There are specific steps you can take to make sure you get approved the next time around – and it might not take as long as you think. 

The following are steps to take after you’ve been rejected from a business loan and how you can improve your situation to increase your chances of approval on your next attempt.

Talk to Your Lender

The first thing you should do after being rejected for a small business loan is try to get into the mindset of the lender. 

Small business lenders – be it traditional banks, alternative lenders or credit unions – make money by giving loans and collecting interest and fees on those loans. Therefore, whenever a small business applies for a loan, they want to be able to approve it. So, if you do get rejected, give them a call, and they will be happy to give you the specific reasons why your application was rejected. 

Also, keep in mind that lenders are in the risk business. The simplest and most general reason that you, the small business owner, gets rejected for a loan is that the lender does not have enough confidence that you will be able to pay back the loan and believe that you represent too much of a risk of default. There are a lot of factors that go into deciding how risky you are as a borrower, and again, the lender will be more than happy to tell you which criteria you didn’t meet.

Improve Your Credit Scores 

When you apply for most types of business loans, the first two items the lender will look at are your credit reports – for both your personal credit score and your business credit score. One of the most common reasons small business owners get turned down for loans is that their credit scores aren’t high enough. 

You can find lenders that are willing to give loans to those with poor credit scores, but they charge exceptionally high interest rates. So,  if you’ve been turned down for a business loan because of your credit scores, it’s worth it to take the time and effort to take steps to improve those scores to avoid paying high interest rates. 

Some steps you can take are:

• Check your credit reports. You can easily access your detailed, personal credit reports through the three main credit bureaus – Experian, Equifax, and Transunion, and you should check your business credit score through the most commonly used business credit bureau, Dun & Bradstreet.  Check for any errors that may be dragging your score down. Remember, in 2022 it was found that on average, 1 in 5 people had errors on their reports. You may have to pay a small fee to gain access to your reports, but it’s worth it in the long run.
• Make sure you have at least 6-9 months’ worth of on-time payments towards your existing debts. This includes payments towards business and personal credit cards and any other debt your small business may have. Nothing hurts your credit score more than a history of late payments on your debt. 
• Pay down existing debt. Credit utilization (the amount of debt you have on your credit cards or business lines of credit vs. your credit limit) is factored heavily into your credit score, so if you can, take a few months to bring that number down. 
• Get another credit card. This might seem counterintuitive at first as you may be thinking, ‘The last thing I need is another credit card.’  However, getting another personal or business credit card (but not using it!) will decrease your credit utilization and can boost both your personal FICO and business credit scores.  BUT, note that this will only help in some situations and it may take some time for you to see the positive impact.  Getting a new card can initially lower your score due to the hard credit pull by the card issuers. In addition, a new card can lower the average age of your accounts.  However, the longer-term gain may just be what you need to tip the scales in your favor!
• Get trade references. If you have good relationships with your suppliers, you can try to convince them to write letters to your credit bureaus stating such. These letters are called trade references, and they can boost your business credit score as most business credit bureaus don’t initially factor that into your credit report. 

Reconsider Your Financing Options

A term loan from a traditional bank isn’t the only way to get the capital you need for your small business, nor are traditional banks the only types or lenders out there. There are financing products in which lenders don’t put as heavy of an emphasis your credit scores, such as:

• Secured loans. A secured bank loan or business line of credit will emphasize credit scores less since they are backed by collateral. 
• Equipment loans. Equipment loans use the equipment being purchased as collateral, so your credit scores typically don’t have to be as high as they would for a standard business loan. 
• Small Business Administration (SBA) microloans and  504 loans. These types of SBA loans are backed by the SBA and are often geared towards younger small businesses, women- and minority-owned small businesses and small businesses that operate in underserved communities, so lenders typically don’t heavily emphasize credit scores when approving these loans. 

Also, if you’ve gotten a loan rejection from a traditional bank (especially for a SBA 7a loan, which has very high standards) because your credit scores are borderline, you may want to try applying with an alternative lender. Alternative lenders often have simpler business loan applications and are more willing to approve borrowers with borderline credit than traditional banks. 

Improve Your Cash Flow

Almost every type of lender will want to see several months worth of bank statements for your business, as well as several years of tax returns in order to gauge your cash flow history. Cash flow is simply the money flowing into your small business vs. the money that’s flowing out. In some cases, you could get rejected for a loan if your cash flow isn’t strong enough. 

In this case, you may want to seek ways to improve that cash flow, but it may be a painful process. The most immediate way to improve your cash flow is to curb your business expenditures. This may mean letting some employees go and curbing excessive business expenses such as trips, business meals, cutting down on low-selling inventory, etc. Doing so could very well get you approved next time. 

Improve Your Business Plan

Traditional banks often require you to present your business plan, especially if you are applying for an SBA 7a loan, which has strict borrowing requirements. If you’re seeking a loan to expand and grow your business, you need to convince the lender that you are going to increase your revenue stream. This is where a business plan comes in handy. 

A detailed business plan tells a lender that you’ve done your research about the market your business operates in, why you believe your business has an edge on its competitors, and how you plan to make money. A convincing and detailed business plan can mean the difference between an approval or a rejection. You can find business plan templates online, and many of them are free. 

Take an Inventory of Your Assets

If your credit scores are borderline, a traditional bank or credit union may ask for a personal guarantee for your loan, which often means putting up collateral. Collateral can include any investment accounts you may have, personal items of high value or even the deeds to your house or car. Keep in mind that these assets can be seized in the event that you default on your loan payments.

Of course, putting up collateral presents a high risk to you, the borrower, but it does have potential rewards. Collateralized loans or business lines of credit can notch you a higher borrowing amount and lower interest rate, as well as cut down on fees and required balloon payments. In essence, collateral can dramatically cut the cost of capital on your loan. 

Try to Expunge Your Record

While it’s rare, small business owners may get rejected for a loan because many lenders want to do business with people of “high character.” This means that if you’ve made a mistake in the past and have been convicted of a crime, late on child support payments, or have an IRS tax lien on your finances, lenders will consider this a red flag and you may get rejected for a loan. If this is the case, you may want to speak to your attorney to see if you can get your record expunged, and get caught up on any child support payments or back taxes you may owe. 

Don’t Give Up

We all know the line made famous by The Godfather: “It’s not personal, it’s just business.” 

This is precisely the case when you’re turned down for a business loan. If you do get rejected, don’t take it personally, and don’t give up. All a loan rejection means is that you need to take steps in order to get approved next time so that you can get the funding you need to improve your small business. Follow the above outlined steps to improve your situation so that, next time, you can get the funding you need to enhance your small business.