When you’re in need of working capital for your business, a secured loan may seem like easy money to keep your cash flow moving. Before you pull the trigger, make sure you know both the pros and the cons of secured loans. More information is always better when trying to make the right move for your small business.
Advantages of a Secured Loan
One of the primary advantages of a secured working capital loan is that you could qualify for a better interest rate since there is less financial risk for your lender. However, you don’t always need to put up personal assets as your collateral, and there are some situations when a secured loan can work to your advantage.
For instance, a secured loan for equipment financing often makes sense because the equipment itself serves as collateral. There’s no risk posed to the rest of your business because the bank would simply repossess the equipment in the event of default.
Remember that equipment is not restricted to just heavy machinery. You can free up working capital by getting equipment loans for technology, office furniture, and medical equipment.
Disadvantages of a Secured Loan
Obviously, the biggest disadvantage is the risk that comes along with a secured loan in case of a worst-case scenario. If you fall excessively behind on payments, the lender can take ownership of whatever property or cash you used as collateral. If you used company assets or capital, that can take your finances from bad to worse.
A more minor (but still present) disadvantage of a secured loan is that they sometimes take longer to fund. The reason is that the lender has to confirm your collateral as part of the approval process. If you’re using your personal property as collateral, it will likely need to be assessed in order to confirm its current market value.
There are lenders who have fast approval processes for unsecured loans. If you prefer not to put up collateral for your next working capital loan, consider using a lender like CMS Funding to get quick financing for your business.