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Secured Loan is suitable for businesses which make significant investments in fixed assets as it allows you to draw funds against assets such as machinery or property as long as the asset is unencumbered, meaning it has not been pledged to other creditors already.
It’s arranged for a fixed period, typically over the expected life-span of the asset used to secure the loan and most lenders will lend up to 80-100% of the value of the asset.
Since secured loans come with collaterals, they pose lower risk of loss to the lenders. For that reason, lenders generally charge more competitive interest rates for secured loans.
Companies with high value assets would be able to borrow against the assets much more than companies relying solely on financial strengths. It all comes down to risk mitigation. If lenders can recover their exposure through collaterals, the credit risk is diminished significantly.
As asset is pledged to lender, lender has the ability to seize the asset whenever there is a credit default on that loan even though the asset value might be much higher than the loan value. This could be detrimental if the asset is instrumental to the company. That’s also the point. Lenders want to discourage late payments, so they won’t hesitate to pull the strings when the time comes. This is something to keep in mind when taking on a secured loan.
In the unfortunate event that you need to restructure your loan to avoid default, lenders are less willing to do so if their exposure is well covered by the collateral. On the contrary, unsecured loan lenders are more willing to compromise during customer’s financial duress.
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