YOUR COMPANY IS LOOKING FOR SECURED LENDING FINANCE!
UNSECURED LOANS VERSUS SECURED LOANS IN CANADA
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Financing & Cash flow are the biggest issues facing business today
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Secured lending empowers businesses by unlocking the value of their assets to secure essential funding.
Struggling to secure the funds your business needs? Discover how secured lending can unlock financial opportunities!
SECURED LENDING IN CANADA
There are various types of secured lending in the Canadian small business environment. Let's examine some of those secured loans and discuss their characteristics.
Types of Secured Lending in Canada
When most business owners or financial managers think of secured lending, they think of their operating loans or lines of credit, sometimes called ‘revolvers’ in finance language.
Term loans from banks, financial institutions, and real estate loans are all subject to secured loan agreements. Your ability to repay the loan is based on personal and business assets; a higher interest rate will often be demanded if a loan needs special structuring.
These loans are used to finance working capital, primarily receivables and inventory. In taking and registering this security, the bank or some similar financial institution will assign the company's ‘liquid assets’. Occasionally, customers will hear the term ‘demand loan,’ and we are, in effect, talking about the same thing. In all business loans, the bank or commercial lender evaluates the personal credit score.
HOW ARE SECURED LOANS SECURED
How does the bank or other institution secure the loan? They register what is known as a General Security Agreement, commonly called a ‘GSA ‘, against the business.
In determining their security and overall’ credit limit’ with the customer, they usually agree to advance against 75% of all good receivables and some inventory components. As a general rule, we can say that banks don’t really like inventory—simply because they aren’t set up to liquidate on it when they have to.
If everything goes well, that is as much as the business owner needs to know. The loan is secured, the bank registers a public security interest against the company, and the company has access to working capital at interest rates that are competitive with its overall credit profile. Lower interest rates are subject to the type and amount of loan your business is looking for. When you apply for a loan, we encourage owners to understand their financing options.
WHAT HAPPENS IF YOUR DEMAND LOAN IS CALLED?
How does the Secured Lender realize on the security?
Again, we are talking about the worst-case scenario when a bank has determined it needs to ‘call the loan, ‘either for a line of credit or term loan, terminology most business owners know too well but hope they never have to live through.
The bank is in effect, at that time, attempting to crystallize on its loan. In securing the loan, we spoke of the bank or other lending institution taking an assignment of the assets, considering the credit risk, which includes credit history and ability to repay. Business credit versus personal credit should be separated whenever possible.
ENFORCEMENT OF LOANS AND CREDIT RISK
Now that the loan has been called, an actual assignment is enforced—the bank notifies customers and collects money to reduce the loan outstanding. The bank now finds itself having to deal with the personal property it did not want to deal with, and we typically find that the personal property is directed to be sold by an auctioneer or salvage firm, who acts as a temporary agent for the bank.
When a small business loan is enforced in this manner, the results are usually disastrous for the customer and have a major impact on the company’s ability to proceed.
LOANS ARE REGISTERED IN CANADA BY FINANCIAL INSTITUTIONS - HERE'S HOW
Lenders’ securities agreements in Canada are all registered under Canada’s Person Property Security Act. They are, in effect, public knowledge for those who wish to investigate secured dealings within the financial services sector.
This process is very similar to the UNIFORM COMMERCIAL CODE (UCC) that exists in the U.S., and in fact, the security legislation in Canada was very closely modelled after the U.S. way of secured lending notification.
Other forms of secured lending are equipment and debentures, and security is generally handled in the same manner as registration, etc.
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Collateral Value: The value of assets used to secure the loan determines borrowing power and risk level.
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Loan Terms: Understanding interest rates and repayment schedules is essential for financial planning.
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Lender Requirements: Knowing what lenders expect, including credit scores and financial statements, can streamline the application process.
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Benefits vs. Risks: Weighing the advantages, like lower interest rates, against potential asset loss is crucial.
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Application Process: Familiarity with the steps involved in applying for a secured loan can increase approval chances.
CONCLUSION
Call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor who can assist you with secured lending needs.
FAQ
What is secured lending and how does it work?
- Secured lending involves borrowing funds against collateral, such as real estate or equipment, which reduces the lender's risk and can lead to better loan terms.
What types of assets can be used as collateral?
- Common assets used as collateral include real estate, equipment, inventory, and accounts receivable, depending on the lender's requirements.
How do interest rates for secured loans compare to unsecured loans?
- Secured loans typically have lower interest rates than unsecured ones because the collateral reduces the lender's risk.
What are the risks associated with secured lending?
- The primary risk is the potential loss of the collateral if the borrower defaults on the loan, which can impact business operations and financial health.
How can secured lending benefit my business?
- Benefits include lower interest rates, higher borrowing limits, and the ability to leverage valuable assets to support business growth and expansion.
How can I improve my chances of getting approved for a secured loan?
- Maintain a strong credit score, prepare detailed financial statements, and ensure the value of your collateral meets the lender's requirements.
Are there any tax benefits associated with secured loans?
- Interest paid on secured loans may be tax-deductible, but it's important to consult with a tax advisor to understand specific benefits and implications.
How long does it typically take to get approved for a secured loan?
- The approval process can vary, but it generally takes a few weeks to a couple of months, depending on the lender and the complexity of the loan.
Can I use multiple assets as collateral for a single loan?
- Yes, some lenders allow multiple assets to be used as collateral to increase the loan amount or improve approval chances.
What happens if the value of my collateral decreases?
- If the value of your collateral decreases significantly, the lender may require additional collateral or other measures to secure the loan.
How does the value of collateral affect my loan terms?
- The value of the collateral directly impacts the loan amount, interest rate, and terms offered by the lender, with higher-value collateral generally leading to better terms.
What are the main differences between secured and unsecured loans?
- Secured loans require collateral, resulting in lower interest rates and higher borrowing limits, while unsecured loans do not require collateral but often have higher interest rates and stricter credit requirements.
How do lenders determine the value of my collateral?
- Lenders typically use appraisals, market analysis, and other valuation methods to determine the current market value of the offered collateral.
