If you are someone that owns and runs a business organization, you might feel the need to raise capital at some stage of your journey. The need to raise capital from external sources like banks, credit unions or online lenders could be for multiple reasons. This is why as a business; you might feel the need to understand the basics of secured finance.
Businesses might be looking to raise capital for anyone of the following reasons-
- To tide over a difficult period of cash flow, like the one many faced during the COVID-19 Pandemic.
- Buy new machinery and infrastructure to boost production or to replace an aging one that is not working anymore.
- Diversify and branch out into newer areas and verticals of the business and funding expansion plans.
- Buying real estate space in the form of office space, factory floors or warehouses for the business.
In this article, we are going to help business owners understand everything there is to know about secured finance or loans. If you are a business owner, looking to raise funds for the organization, you should stick around and read what we have to say.
Secured Finance and Business Loans: Meaning and Definition
In very simple words, secured finance or loan is a form of credit extension to a business that is provided by a financial institution against a personal guarantee as well as collateral.
The business pledges its assets to the lending institution as collateral for the duration of the loan period or term. The belief is that if by any chance, the business is unable to repay the loan amount, the financial institution can get ownership of the pledged assets and auction it to recover its due amount.
A secured finance or business loan also requires the personal guarantee of the business owner or directors as the case may be. In case of default, legal proceedings can be initiated by the bank or lender against the individuals who acted as guarantors.
The following are the major collaterals that are offered by businesses to lending institutions-
- Land and other real estate space that is in the name of the business
- Machinery, infrastructure, and parts of the business
- Commercial vehicles that the business owns and operates
Major Benefits of Secured Finance for Business: By Financial Experts
In this section, we are going to look at some of the advantages that secured finance or business loans bring-
- Ease of Approval from Financial Institutions-
The first major benefit of secured business finance is that the rejection rate is very low. The simple reason is that when the collateral is provided, banks and other lenders feel that their credit extension is secured and they do not hesitate to roll out the funds. In terms of security, there is no risk, and hence the ease of getting approval is very high.
- Immediate transfusion of funds into the business-
As a business, when you apply for an unsecured loan (without any collateral offering) there are tons of paperwork you would be required to go through. The process can take days. As against this, a secured loan where the collateral is pledged can be disbursed within a couple of days. This immediate cash infusion can prove to be important and necessary in certain situations.
- Lower interest rates which are attractive for the business-
Financial institutions and lenders offer secured business finance or loans at a far lower rate of interest than unsecured loans. For a business, this means that the monthly or quarterly EMI payments are not going to be too big of a headache. When the purpose of securing the finance starts paying dividends, the monthly payments become easy and do not affect cash flow as much.
- The amount of financial credit secured can be large-
Businesses that are looking to offer collateral for secured finance are often looking for large amounts of capital. This is perfect since secured business finance is famous for allowing businesses to raise exactly this. Experts point out that the credit offered is 80% to 90% of the value of the collateral. This can be a huge amount of credit infusion to the business.
- Better protection, security, and regulations of formal authorities-
Secured business finance is regulated by the two powerful governmental bodies. The Financial Conduct Authority (FCA) and the Financial Ombudsman Services regulate every transaction to ensure that the interests of business organizations are protected. Financial institutions are notorious for tying up businesses in legal complications even when the terms are fair enough.
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Which kind of Businesses should opt for Secured Business Finance and Loans?
There are some specific classes of businesses that are perfectly suited to raise secured business finance. Let us look at some of them in this section-
- Firstly, SMEs, MSMEs, and Start-Ups are prime candidates for secured business finance. The biggest reason for the same is that this type of financial credit allows for a greater level of flexibility. This is something that the above-mentioned businesses can benefit from incredibly.
- Start-ups, where owners and founders are looking to pledge their personal assets, are not uncommon or unheard of. In most cases, this is the first capital infusion that is made into a new venture. For these business models, where the founder and owner are everything, secured finance is a logical approach model for funding.
- Many businesses receive payments after a couple of months. They use their funding for the production process and want to ensure financial credit to help in overcoming cash flow problems. Many businesses engaged in EXIM processes can benefit from secured finance.
- Businesses that have a lot of assets and investments and do not want to disturb them (by selling) are prime candidates for secured finance. They end up easily paying the loan amount and getting back the pledged assets. This ease of repayment also helps them build their credit history over the period.
The Final Takeaway
In this article, we have covered some of the key points that you should know about secured finance. If you can work with a reputed and established financial lender, you will have no problem in terms of engagement concerning secured finance. If you would like us to assist you in any which way on the topic, feel free to reach out to us in the comments section.