Is your business ready to secure the funding it needs?
Secured loans offer a powerful way to access the capital necessary for growth, and the value of your collateral plays a crucial role in determining the loan amount and terms. For many small and medium enterprises (SMEs) in the Philippines, secured loans provide an opportunity to unlock better financing options and larger sums.
In this blog, we’ll explore the various types of secured loans, the different forms of collateral you can offer, the eligibility criteria for securing these loans, and the associated benefits and risks.
What is a Secured Loan?
A secured loan is a loan that requires collateral. This means the borrower agrees to offer something of value, such as property, equipment, or even a vehicle, as security for the loan. If the borrower can’t repay, the lender has the right to take the asset to recover the money.
This setup reduces the risk for lenders, so secured loans often come with more favorable terms, such as lower interest rates or higher credit limits. For small businesses, offering collateral can make it easier to get approved, especially when applying for larger loans.
Common Secured Loan Options in the Philippines
Secured loans come in many forms, each tied to a different type of collateral. Here are the most common ones.
- Home Loans (Mortgages): These are used to buy property. The house or land you purchase becomes the collateral for the loan. Because the loan is backed by real estate, borrowers can often access larger amounts with longer repayment terms.
- Auto Loans: Auto loans help you purchase a vehicle, with the car itself serving as collateral. It’s a popular choice for those who need a vehicle for personal or business use but don’t want to pay the full amount upfront.
- Business Loans with Collateral: These are ideal for SMEs looking to expand, manage operations, or improve cash flow. Lenders may require collateral, such as property, equipment, or inventory, as security for the loan. This type of loan can offer better interest rates and higher limits if your collateral has strong value.
- Land and Agricultural Loans: If you're investing in farmland or starting an agri-business, these loans are an option. You can use land or other agricultural assets as collateral to get the funding you need to start or grow operations.
- Pawn Loans (Sangla): Pawn loans are a quick and convenient way to obtain cash. You offer a valuable item, often jewelry, to a pawnshop, and they lend you money based on its worth. You can retrieve your item once the loan is repaid, typically within a short period.
These are just a few secured loan options available for your SME business. To move forward with the application process, consider the type of collateral you can offer, as it significantly impacts the loan approval.
Not sure which loan type or collateral fits your business best? n90’s financial experts can guide you through the options—whether it’s a property-backed loan, invoice financing, or equipment lending, ensuring your chosen path aligns with your growth goals. Consult with n90 to identify the best secured loan strategy for your SME.
Types of Collateral Used for Secured Loans
When considering a secured loan, choosing the right collateral is essential. The collateral you provide helps determine the loan terms, such as interest rates, credit limits, and repayment schedules.
Different types of collateral come with varying degrees of risk, but they also offer businesses an opportunity to access larger loans, better terms, and quicker approvals.
1. Property
Property is a widely used form of collateral, offering stability and value to lenders. This includes real estate, such as land or buildings, which tends to appreciate over time, providing added security. Personal assets such as cars or motorcycles also serve as collateral but can depreciate more quickly, particularly in the case of vehicles and machinery.
Despite this, the property remains a preferred choice due to its ease of liquidation. Whether it’s real estate or personal property, it provides lenders with a precise and reliable means to recover their investment if the borrower defaults.
Example: If you own a delivery truck used for your business, you could pledge the truck's Certificate of Registration (CR) and Official Receipt (OR) as collateral, unlocking the cash you need for operational expenses or expansion.
2. Equipment
Equipment is a valuable form of collateral for businesses. This can include machinery, vehicles, technology, or other high-value assets essential to operations. Equipment is especially relevant for SMEs, as it directly supports day-to-day business activities and can indicate business health. Lenders are more likely to approve a loan if the equipment is relatively new and in good working condition.
However, older equipment may lose value over time, which could affect the loan amount or terms. This makes it crucial for business owners to assess the value and condition of their equipment before using it as collateral.
Example: If your business relies on construction equipment, pledging a crane or excavator could unlock capital to purchase additional machinery or cover operational costs.
3. Cash or Bank Deposits
Although it may seem unusual, some banks accept cash or bank deposits as collateral. This involves pledging your savings account or fixed deposit to secure the loan.
Cash is the most liquid form of collateral, which makes it highly appealing to lenders. It is easy to access and doesn’t depreciate like physical assets. As a result, loans backed by cash often come with lower interest rates and faster approval times, offering both borrowers and lenders a straightforward and efficient option.
Example: If your business has ₱500,000 in a savings account, you could use it to secure a loan. In case of a default, the bank can simply deduct payments directly from the account.
4. Inventory and Invoices
Inventory and invoice financing are excellent options for businesses with stock or goods for sale. With inventory financing, businesses can borrow against their stock, while invoice financing allows borrowing against unpaid invoices or future payments from clients.
Both options provide revolving credit, offering businesses the flexibility to borrow against future stock or invoices. This is especially useful for managing cash flow, particularly when payments from clients are delayed but operational expenses still need to be covered. Lenders view this as a safer option since it’s directly linked to your revenue and ongoing business activity.
Example: A retail store could use its unsold inventory as collateral. Alternatively, if you’re a service business waiting on payments from clients, you can use those outstanding invoices to secure a loan.
Financial services, such as n90’s Invoice Financing, can help businesses manage their cash flow more effectively by offering tailored solutions that utilize inventory or invoices as collateral. Apply Now!
5. Blanket Liens
A blanket lien is a legal claim that allows a lender to seize all the assets of a business if the borrower defaults. These can include property, equipment, inventory, or other valuable assets.
Blanket liens provide lenders with broader security by covering multiple assets, reducing their risk. They are often used when a business needs a larger loan but doesn’t have a single high-value asset to offer. This gives lenders greater confidence in lending, knowing they have access to a broader range of collateral.
Example: If your business has multiple assets, such as machinery, vehicles, and inventory, but no single item that stands out in value, you may agree to a blanket lien. This means that all these assets could be at risk if the loan is not repaid on time.
When selecting collateral, it is essential to assess what is at stake, choose assets you can afford to lose if the loan defaults, and ensure they provide sufficient value to secure the loan. Consider factors such as depreciation, liquidity, and the level of risk you are willing to accept.
Once you've selected your collateral, the next step is to evaluate your eligibility for the loan, understanding the lender’s criteria to ensure a smooth application process.
Eligibility Criteria for Secured Loans
Before applying for a secured loan, it’s crucial to understand the typical eligibility criteria set by lenders. While these can vary depending on the lender, most institutions generally look for the following.
- Age and Citizenship Requirements: Borrowers must typically be at least 21 years old and a Filipino citizen. Foreigners may be eligible if they hold the appropriate visa status.
- Income and Employment Considerations: Lenders assess your income and employment stability to ensure you can repay the loan. You will likely need to provide proof of a consistent income source and job stability, such as pay stubs or tax returns, to demonstrate financial stability.
- Value and Condition of the Collateral: The value and condition of the collateral you offer play a significant role in eligibility. Lenders evaluate the collateral’s worth to ensure it provides sufficient security to cover the loan amount in the event of default.
- Credit History and Financial Standing: While secured loans are generally more accessible for borrowers with less-than-perfect credit, lenders may still review your credit history and overall financial standing. A positive credit history could result in more favorable loan terms.
- Necessary Documentation: To complete the application process, you will need to prepare the following essential documents, such as proof of identity, proof of income, proof of address, and documentation related to the collateral being offered.
Secured loans can give you access to larger amounts and better terms, especially if you meet the lender’s criteria. But they also come with the risk of losing your collateral if things don’t go as planned. That’s why weighing the pros and cons matters before moving forward.
Benefits and Risks of Secured Loans
Secured loans offer distinct advantages, particularly in accessing larger amounts of funding with more favorable terms. However, they also come with certain risks that borrowers need to be aware of. While the collateral provides security for the lender, it is essential to weigh the benefits against potential downsides before committing.
Secured loans involve pledging assets as collateral in exchange for financing, creating a balance between opportunity and obligation. While they can offer valuable support, they also carry specific risks tied to the collateral. Hence, it is essential to weigh the benefits against potential downsides before committing.
Let’s explore both sides of secured loans.
Benefits of Secured Loans
- Lower Interest Rates: Since secured loans are backed by collateral, lenders typically offer more favorable interest rates, reducing the overall cost of borrowing.
- Larger Loan Amounts: With collateral in place, you can access more substantial loan amounts, making secured loans a suitable option for major expenses such as purchasing property, expanding a business, or funding large projects.
- Longer Repayment Terms: Secured loans often come with longer repayment terms, which can make it easier to manage payments over time, especially for significant loans like mortgages or business loans.
Disadvantages of Secured Loans
- Risk of Losing Collateral: The most significant downside of secured loans is the risk of losing the collateral if you fail to repay the loan as agreed. It is essential to carefully consider your repayment capacity before committing to a secured loan.
- Potentially Longer Approval Process: The approval process for secured loans can be longer, as lenders must assess the value and condition of the collateral to ensure it is sufficient for the loan. If you need quick access to funds, this might be a disadvantage.
- Limitations on Fund Usage: Some secured loans come with restrictions on how the funds can be used. For instance, a business loan secured by equipment may be limited to purchasing or upgrading machinery rather than covering general operating expenses.
Having the proper knowledge of both the advantages and limitations of secured loans can help you make a more informed decision, aligning the loan structure with your financial goals and risk capacity.
Final Note!
The decision to opt for a secured loan is a strategic one, where understanding the full spectrum of collateral options and their implications is key to maximizing benefits and minimizing risks. The right collateral can open doors to larger funding amounts and more favorable terms, but it is vital to consider the value of the asset you are offering and how it aligns with your long-term goals.
For businesses managing the complexities of securing financing, partnering with a reliable provider like n90 can help you streamline the process. n90 offers tailored financing solutions that match your unique needs, ensuring you maximize the value of your collateral while minimizing associated risks.
Explore financing options that match your business goals—apply now to secure the support you need to grow and thrive.
FAQs
1. Can I use a family heirloom as collateral for a secured loan?
A: Yes, in some cases, valuable personal assets like family heirlooms can be used as collateral, provided they hold sufficient value. However, it is essential to ensure that the item is appraised and meets the lender’s criteria. Lenders will also typically require proof of ownership and assess the potential resale value in the event of loan default.
2. How does the interest rate on a secured loan compare to an unsecured loan?
A: Secured loans generally come with lower interest rates compared to unsecured loans because the lender has collateral to fall back on in case of default. This reduces the risk for the lender, making them more willing to offer favorable terms, such as lower rates. However, rates can still vary depending on the type of collateral and the borrower’s financial standing.
3. What happens if I am unable to repay my secured loan?
A: If you default on a secured loan, the lender has the right to seize the collateral you pledged to recover the loan amount. This can include property, vehicles, or business assets. It’s important to assess your ability to repay the loan before committing to a secured loan, as losing the collateral can have significant consequences for your personal or business finances.
