Let’s start with this: if you’re a small or new business, getting a secured business loan from your neighborhood bank — or any bank for that matter — is much easier said than done. Since the Great Recession, banks have dramatically dialed back their small business lending.
Ostensibly, they claim this is to be prudent and mitigate risk. In truth, it’s because moving upstream to serve larger businesses is much more profitable. If you own shares in a bank, perhaps this is perfectly fine. But if you’re a small business owner — or a community that depends on small businesses to generate economic activity, create jobs and boost tax revenues — then it’s not OK. In fact, it’s dreadful.
What’s more, there are some things about secured business loans that banks typically don’t disclose (i.e. it’s buried in the of the terms and conditions), but that you need to know before investing dozens of hours to put together a comprehensive multi-document application. These include:
You’re not being secured. Your bank is.
The word “secured” in the phrase “secured business loan” does not mean that the loan is somehow more stable and safer; at least not for you. Rather, it means that you must “secure” the loan with collateral. As such, it’s the bank that benefits from this arrangement, not you. If you miss a payment, your pledged assets could be immediately possessed and liquidated to cover the debt (plus interests, costs and penalties). This is not the case with unsecured business loans, which do not require collateral.
Your numbers and your bank’s numbers may not add up.
Banks are notorious for under-valuing collateral, since it further reduces their risk exposure. For example, if you have a piece of industrial equipment that it easily worth $50,000 in the market, your bank might appraise it at $35,000. That means you either need to come up with more collateral, or you’re not getting the loan.
Your personal assets may be on the block.
If you run into the common scenario described above, then you may need to pledge personal assets — like your home, car, jewelry, etc. — to get the business loan. This is the kind of stuff that can keep you up at night, and unless you have a very understanding spouse, expect there to be some “tense discussions” around this arrangement.
You’ll be paying for the valuation process.
Regardless of whether your application is approved, you — not your bank — will be paying for the collateral evaluation. What’s more, you’ll be paying for this up front.
There’s nothing wrong with taking out a secured business bank loan – provided that you have all the facts, and make absolutely no assumptions; especially about collateral. Hopefully, the above will point you in the right direction, which is the one that is best for your business’s future — not your bank’s bottom line!