Secured lending is nearly risk free lending and much the preferred sort of loan for the financial institution or mortgage company. For most private individuals, the biggest loan they will take out is their home mortgage and for that secured lending they use their home as collateral.
Collateral is defined as the asset or asset that you pledge to obtain credit, such as a personal or small business loan. Not only your house, but your car, your business equipment, a vacation home, a boat or other property can be used as collateral when you need secured lending.
The primary advantage of these secured loans, as opposed to unsecured loans (also called first charge loans in the UK, or signature loans) are that the interest rates for them are lower.
For those who are interested in starting a small business, however, secured lending might be difficult or impossible. Most small business people, especially the growing number of entrepreneurs and netpreneurs who are starting a business out of their home, they simply don’t have the collateral to get that secured lending money.
Their home may already be mortgaged, they might be renters or they may not have enough equity in their homes. For these startup business hopefuls secured lending hopes must be replaced by the reality of equity financing.
When we talk about equity financing, as opposed to secured lending from the standard financial institutions, we’re talking about money that comes from the small business owners’ private funds or from other individual or company investors.
A company that goes public and gets an infusion of money through the sale of stock is acquiring equity financing. Venture capitalist or angel companies are typical equity financers for small start up firms.
An entrepreneur who cashes in her 401(k) to buy a new business computer and printer, who spends his inheritance on manufacturing assembly parts, who uses his savings to buy small business equipment, or sells his classic car collection to lease a storefront location, are all using equity financing to fund their business.
Generally, as far as possible, equity financing is the preferred for a small business start up fund. It is far better to go this route than to begin with secured lending options that leave you in debt right off.
The other important factor in using your own money to start up your own company is that anyone else or any other firm considering investing in you will want to see that you are heavily invested in a practical as well as emotional way. Nothing shows this more than betting your own life savings on your new venture.
Even when you look for secured lending resources shortly after or farther down the small business road any lender will want to see that somewhere between one fourth and one half of the financial start up for your company came from your own funds.
That tells them not only that you are very committed but that you thought this through and prepared well in advance. If you’re not willing to assume much of the risk, why, say these venture capitalists, angel investors and financial institutions, should we?