Accessing capital as a business owner isn’t always easy, because you need to convince lenders you’re a safe bet. That’s why some business owners choose to get funding through secured business lines of credit.
This involves putting up an asset as collateral to get a loan. Lenders may be more willing to take a chance on a business owner if they know a loan is backed by an asset of comparable value.
Businesses that are looking for funding should keep the following points in mind if you’re considering this option. This guide will help you better understand whether pursuing a secured line of credit is the right choice for your needs and goals.
Why Secured Loans Exist
Again, lending money to a small business owner is inherently risky. Lenders need to be confident you won’t default on your loan, ultimately making it difficult for new entrepreneurs with limited experience to secure funding.
Securing the loan by putting up an asset as collateral offers them this confidence. They know if you don’t pay a loan back with money, they can seize your assets.
That means you will be taking some degree of risk if you go this route. Make sure you’re willing to part with an asset before you put it up as collateral.
Different lenders prefer different types of assets to be used as collateral for secured business lines of credit. Real estate is a common option. However, you may not have real estate to offer, especially as a young entrepreneur.
Thus, you should discuss other forms of collateral a lender would be willing to accept. That may include inventory or equipment, among others. What’s most important is that the asset is genuinely valuable to a lender.
Benefits of Secured Business Lines of Credit
There are many ways entrepreneurs can potentially benefit from getting secured business lines of credit. First, they’re typically easier to qualify for than other types of loans. This is helpful to any business owner struggling to secure funding. They also frequently have lower interest rates than other business loans, an extremely beneficial aspect if you need funding now but are worried about accumulating major debt due to higher interest rates.
Of course, there are instances when getting an unsecured line of credit may be the better option. Sometimes a business owner simply doesn’t possess the assets necessary to put up collateral. Even if you do, you might not want to risk losing them. You also don’t need a secured line of credit if your business is relatively established. Odds are good you can qualify for a loan with lower rates instead.
These are all factors to consider when deciding how to fund your business. Remember, there are many funding options out there. Although a secured business line of credit may be suitable for some people, no single option is right for everyone.
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