Advertiser Disclosure

College Students and Recent Grads

What Is the NSLDS? A Tool to Keep Track of Student Loans

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

iStock

Over the course of a college career, a student may take out multiple education loans of different amounts and term lengths. Loans are often granted on an annual basis, and by the time you graduate, it’s easy to lose track of your total borrowing.

What’s more, holders of federal loans get a short reprieve from repayment after graduation — up to six or nine months, depending on the loan time — making it can be easy to forget that you’ve got money due. It’s smart to use that grace period to begin planning for repayment, rather than viewing it as a vacation from thinking about your college loans.

One of the best ways to keep track of your federal student loans and payments is through the National Student Loan Data System, a centralized database for federal student loan and grant information managed by the U.S. Department of Education. By checking in regularly on the NSLDS, you can stay on top of how much you owe, the repayment terms of your loans and the monthly payment amounts.

For new graduates making a budget — sometimes for the first time — this student loan information can help them understand how much money they need to set aside for monthly payments, or if they need to look into alternative loan repayment programs.

“It’s a helpful tool, and so often as humans, we’re inclined to denial or procrastination,” says Melinda Opperman, executive vice president with Credit.org, a nonprofit organization focused on personal finance education. “By ignoring that tool, you could have a problem compounding. See what’s in there, and get yourself anchored and prepared.”

What’s the purpose of the National Student Loan Data System (NSLDS)?

The NSLDS was authorized as part of the 1986 Higher Education Act (HEA) Amendments and is administered by the Office of Federal Student Aid. It was formed with three purposes:

  • To better the quality of student aid data and its accessibility
  • To decrease the administrative work required for Title IV Aid
  • To decrease fraud and abuse of student aid programs

The NSLDS initially focused on federal loan compliance but eventually expanded to encompass detailed data from federal student loan and grant programs in which students are enrolled.

Where does the NSLDS get its information?

The NSLDS gets information from several government and loan processing services. Here are the sources for NSLDS data:

  • Guaranty agencies, which are state agencies or private, nonprofit organizations that provide information on the Federal Family Education Loan (FFEL) Program
  • Department of Education loan servicers
  • Department of Education debt collection services (information about defaults on loans held by the Department of Education)
  • Direct loan servicing (information on federal direct student loans)
  • Common origination disbursement (information on federal grant programs)
  • Conditional disability discharge tracking system (information on disability loans)
  • Central processing system (information on aid applicants)
  • Individual schools (information on federal Perkins loan program, student enrollment and aid overpayments)

When data from these sources are combined, you can get a comprehensive overview of your outstanding loans, repaid loans and repayment schedules.

The NSLDS is updated according to each organization’s loan reporting schedule. Some report monthly, and many report data more frequently.

What you’ll find on the NSLDS

After signing up for an FSA ID (Federal Student Aid ID), you can log into the NSLDS to see the updated status of your federal student loans and grants, as well as your college enrollment status and the effective date of your status.

Loans are listed from newest to oldest, and you can find more information about each, including the loan servicer’s name and contact information, by clicking on the loan number. You also will have access to an array of details about each of your federal loans and grants:

  • Name
  • Disbursed amount
  • Date of disbursement
  • Last-known balance
  • Outstanding interest
  • Status (e.g. repayment, in grace, paid in full)
  • Status effective date
  • Interest rate
  • Progress toward the 120 qualifying payments needed for Public Service Loan Forgiveness
  • Income-driven repayment plan anniversary date

“It gives a centralized, integrated view of the loans and grants under the student’s complete life cycle,” Opperman says. “Everything is there.”

You may see a lot of terms and abbreviations you don’t recognize, but there’s a glossary to help you understand them.

What you won’t find

The NSLDS only provides information about federal loan programs, so you will not see details about private loans. To get that information, you’ll need to contact your private loan’s servicer or your school’s financial aid department. You also can review your credit report (you are entitled to one free credit report annually) to find the information.

You also won’t find:

  • Real-time balance accounts. You should see the outstanding principal balance for each loan, but this number may not include the most recent data. Contact your loan servicer for the most up-to-date numbers.
  • Information about nursing and medical loans. While these are federal loan programs, they are not included in the NSLDS. Contact your school’s financial aid department for information about nursing or medical loans.
  • Loans you are not responsible for paying. Any federal loans your parents took out on your behalf, including federal PLUS loans, will not be listed on your NSLDS account. For information about federal student loans that they are responsible for paying, your parents will need to create their own FSA ID and password to access the NSLDS data.

Even with these gaps in information, the NSLDS is a great place to start when you’re not sure whom to contact with student loan questions or when you’re trying to get on top of your loan payments. It’s also helpful if you’re trying to figure out what type of loans you have, which is necessary when you’re applying for certain loan forgiveness programs.

How to sign up for the NSLDS

As mentioned previously, to use the NSLDS you must have an FSA ID username and password, which serve as your login information and allow you to access data about your federal loans and grants online. The ID and password also provide access to many other Department of Education websites.

To create an FSA username and password, visit this link. Opperman says the certified student loan counselors who work with Credit.org recommend you never give out your FSA number or password, even to credit counselors. This information carries the legal weight of a signature, and it can be used to commit identity theft. Credit counselors can get student loan information from you rather than by directly accessing your NSLDS account.

The FSA ID and password application requires your email address, mailing address, date of birth and Social Security number. A cellphone number can be provided if you’d like to bypass answering security questions to retrieve an FSA ID or password.

To look at your federal loan and grant information, click on “Financial Aid Review” after entering your FSA ID and password into the NSLDS website. You do not have to enter loan information, as agencies that issued your federal grants and loans will be responsible for reporting information to the NSLDS.

Is this site accurate?

While the information on the NSLDS generally is accurate because it is provided by loan servicers, it is usually not up to date. Organizations that provide loan information for the NSLDS report on different schedules..

What if the info is wrong?

The NSLDS is not infallible; it’s important to check your page regularly for errors and inaccuracies. Here are some common issues with the NSLDS and how to remedy them:

An error

Check the NSLDS record for this loan, and contact the data provider listed. You will need to give the data provider information that will help the organization look into the error and remedy it. If the data provider is uncooperative and will not fix the error, contact the NSLDS Customer Service Center at (800) 999-8219.

Missing data

If updated loan information is not available within 45 days of disbursement, contact a guaranty agency, the loan’s servicing center or your school’s financial aid office. Otherwise, allow for typical time lapses in reporting.

Frequently asked questions about NSLDS

Usually, no. Typically, only data providers can update information related to your loan when they make their reports to the NSLDS.

The site has an SSL certificate, which means all data passing between your web browser and the site server is encrypted (provided you’re using an SSL-compatible browser, like the latest versions of Chrome, Firefox, Safari or Internet Explorer).

The Department of Education does not charge a fee to use the site.

The site is designed to work best with Microsoft Internet Explorer. You can use other browsers, but keep in mind that the NSLDS pages may not function or display properly on other browsers. The NSLDS system requirements page provides help with browsers and a link to contact information for further assistance.

You are strongly advised not to share your FSA password — ever — as your FSA ID and password are for your use only. Anyone else who uses your FSA information is committing a security violation, and your user ID can be terminated. Organizations can lose access to the NSDLS if they share FSA IDs and passwords.

No. FSA ID passwords expire every 90 days. Fifteen days before the password expires, you will see a warning that it must be changed soon. Users can reset their passwords anytime during that 15-day window by clicking on the “change password” link on the FSA login page.

In this situation, call the NSLDS support number: (800) 999-8219.

You can call the Federal Student Aid Information Center at (800) 4FED-AID — 1-800-433-3243 — between 8 a.m. and 11 p.m. Eastern Time, Monday through Friday, and 11 a.m. to 5 p.m. on Saturday and Sunday. This helpline is not available on federal holidays. You can also contact the office by email or live chat through the website.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Marty Minchin
Marty Minchin |

Marty Minchin is a writer at MagnifyMoney. You can email Marty here

Disclaimer

Student Loan
earnest

Refinance with Earnest

Refinancing rates from 1.81% APR. Checking your rates won’t affect your credit score.

Advertiser Disclosure

Mortgage

How to Determine If a No Closing Cost Refinance Is Right for You

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

iStock

A home mortgage refinance doesn’t come cheaply, as homebuyers typically must pay thousands of dollars in closing costs and fees to finalize a loan. These expenses can seem endless as you get bills for everything from attorney fees to an appraisal to a loan origination fee. Closing costs vary by lender, loan amount and location, but in the end, they’re usually up to 3 percent of the home’s purchase price. For a $200,000 loan, that means closing costs of roughly $6,000.

For many homebuyers, these upfront costs put refinancing out of reach.

What is a no closing cost refinance?

A no closing cost refinance means that you refinance your home mortgage without paying thousands of dollars in upfront closing costs and fees to close the loan. But that “no” in the name can be confusing, because you’re not really avoiding that expense. While this process can save homebuyers money upfront, lenders work in closing costs elsewhere either by slightly raising interest rates or adding the closing costs to the balance of the loan.

How do I get one?

You can refinance your mortgage with no closing costs at banks, credit unions or other lenders. Standard qualifications for refinancing will apply, including a property value that exceeds the amount of the refinance and a credit score that is greater than lender minimums (usually more than 620). Lenders also typically expect your refinance payment and other debt payments to total less than 43 percent of your gross income.

Savings analysis: No closing cost refinance vs. regular refinance

No closing cost refinance doesn’t always result in savings. Homeowners who have a good idea how long they will stay in the house will be in the best position to decide whether refinancing without closing costs is a good idea.

Here is a comparison between a standard refinance and a no closing cost refinance where the lender slightly raises the interest rate to compensate for the lost closing costs. Loan officers will raise your interest rate based on daily market rates.

Regular refinance

No closing cost refinance

Mortgage balance

$200,000

$200,000

Closing costs

$4,800

None at loan closing

Refinance interest rate

3.5%

4.1%

Term

30 years

30 years

Monthly payment

$898

$966

Total cost of mortgage*

$323,312

$347,903

In this example, a homeowner who stays in his home for at least 30 years will save $68 per monthly payment and more than $24,500 over the life of the loan with a lower interest rate. The additional interest that comes with the no closing cost refinance loan far exceeds the $4,800 of closing costs with a regular refinance.

Another common way lenders will refinance a mortgage with no closing costs is to roll the costs into the balance of the loan. Here’s the same mortgage using this option.

Regular refinance

No closing cost refinance

Mortgage balance

$200,000

$204,800

Closing costs

$4,800

None at loan closing

Refinance interest rate

3.5%

3.5%

Term

30 years

30 years

Monthly payment

$898

$920

Total cost of mortgage*

$323,312

$331,072

The no closing cost refinance costs an extra $22 per month. If you stay in your home for the duration of the loan, the no closing cost refinance would add an additional $2,960 to your mortgage expenses (after accounting for the $4,800 you’d pay upfront for the regular refinance).

For homeowners who only plan to stay in their homes five years or fewer, however, refinancing with no closing costs could help them break even or come out ahead on closing costs. Here’s a breakdown.

Regular refinance

No closing cost refinance

Mortgage balance

$200,000

$200,000

Closing costs

$4,800

None at loan closing

Refinance interest rate

3.5%

4.1%

Terms

30 years

30 years

Remaining balance after five years

$179,394.15

$181,185.57

With a no closing cost refinance, you would pay about $1,790 more on a $200,000 mortgage if you got a regular refinance; however, you would have paid the $4,800 in closing costs upfront, meaning you’d save money in the long run with a no closing cost refinance (assuming you sell the house after five years).

Is a no closing cost refinance a good idea?

The upside

The biggest advantage of a no closing cost refinance is you do not have to come up with several thousand dollars in cash to close on your refinanced mortgage. Closing costs can add up quickly as you factor in an appraisal, loan origination fee, and other charges, and many buyers simply can’t afford them. A no-cost refinance doesn’t eliminate those costs, but it does spread them out into monthly payments, allowing you to pay for them over time.

The downside

Over the life of a loan, a refinance with no upfront closing costs can add up to a significantly more expensive choice than a traditional refinance. You can use a refinance calculator to help you figure out whether a no-cost refinance is worth it.

Is a no closing cost refinance right for you?

As you are thinking through whether a refinance with no closing costs is right for you, here are some questions to consider.

Will you qualify to refinance your mortgage?

Before applying, make sure your credit score is high enough to be approved for a refinance loan. You’ll also need to have sufficient equity in your home and a debt-to-income ratio of less than 43 percent, in most cases.

Will refinancing lower your monthly payment?

If your goal is to get a lower monthly mortgage payment through refinancing, a traditional refinance will likely be your best bet. A no closing cost refinance could also lower your monthly payment, though. Don’t forget to calculate in either the higher balance or higher interest rate you’ll have after the lender factors in closing costs. Before you agree to the refinance terms, be sure they will lower your monthly payment enough to be worthwhile.

How long do you plan to stay in your house?

If you are planning on selling your house in less than five years, a refinance with no closing costs almost always will save you money. You may have a higher monthly payment than a regular refinance, but if you get out of the mortgage after a few years, you likely will have spent less than if you had taken out a traditional refinance and paid closing costs.

If you plan to stay in your house indefinitely or longer than several years, a no closing cost refinance may be much more costly in the long run.

How to shop for mortgage refinance loans

To compare no closing cost refinance offers, visit financial institutions and talk with loan officers. They will look at current interest rates and your financial information to help you determine whether refinancing with no closing costs will work for you.

One advantage of no closing cost refinances is that they eliminate the closing costs and fees that can make loan-offer comparisons complicated. With quotes for no closing cost refinance mortgages in hand, you can easily compare interest rates. This allows mortgage shoppers to more effectively shop around and find the best deal.

What to look out for

As you should before agreeing to any loan terms, make sure you understand all costs involved. While a lender may not be charging closing costs when the loan is signed, there may be other fees and expenses that aren’t waived. Ask about fees and what they include. These could be:

  • Government transfer taxes
  • Homeowners insurance
  • Escrow funds

Some no closing cost refinance loans come with prepayment penalties to steer borrowers away from refinancing the loan quickly for a lower interest rate. Check the rules of the loan to make sure there are no prepayment penalties.

Where to shop for no closing cost loans

Traditional lenders, such as banks and credit unions, as well as other private lenders, may offer a refinance mortgage with no closing costs. You can compare current refinance rates with the online comparison tool by LendingTree, our parent company, but you’ll need to talk to a mortgage loan officer to determine what your refinance with no closing costs would look like.

If you have kept up with your mortgage payments but have little or no equity in your home to qualify for refinancing your mortgage, the federal Home Affordable Refinance Program (HARP) can help. If you qualify, you could refinance with a low interest rate and favorable terms. HARP also does not require a minimum credit score and will roll closing costs into the new loan.

Beware of closing cost scams

While refinancing your mortgage, you may receive emails that appear to be from your lender asking you to wire them closing costs. Do not respond, the Federal Trade Commission (FTC) warns, as this is a phishing scam trying to get your personal information and empty your bank account. This scam begins when hackers break into homebuyers’ or real estate professionals’ email accounts and steal information about real estate transactions they are working on.

You should never send financial information by email, the FTC warns.

How to save on closing costs

If you’re worried upfront closing costs will make refinancing your mortgage too expensive, shop around. Closing costs can vary widely by lender and location, and remember that they’re negotiable. The more options you research, the better you will be able to choose the deal that allows you to pay the least for closing costs.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Marty Minchin
Marty Minchin |

Marty Minchin is a writer at MagnifyMoney. You can email Marty here

Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply

Advertiser Disclosure

Small Business

The Ultimate Guide to Secured Business Loans

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Opening or expanding a small business usually involves a significant financial investment, whether it’s paying for building renovations, computers or additional inventory. For new business owners with ambitious plans, this type of investment often requires more capital than they have on hand, and existing businesses may not have enough cash available to grow while continuing to pay regular operating expenses.

One common solution is a business loan, which can be secured from banks or other private lenders for more favorable terms and lower interest rates than unsecured loans.

In this guide, we’ll cover:

Part I: Understanding Secured Business Loans

USBL Table

Business loans typically are secured or unsecured, and the type of loan that you can qualify for will depend on market conditions, your credit score, your assets and your business’s profitability and outlook.

Secured business loans require collateral – as much as 80 percent or more of the loan’s value, which shows that the borrowers can repay the loan if the business fails or the loan goes into default. That means that business owners need to show the lender that they are willing to take on significant risk, including the possibility of losing their house or business assets, to secure financing for their business venture.

Unsecured loans do not require collateral and typically are easier to qualify for. For secured business loans, on the other hand, lenders look for applicants who are in a position to pay the loan back regardless of the business’s success and are willing to risk their own assets for the business. Applicants also need to have good credit and businesses that are feasible in the current market.

“That’s why [lenders] want people to have a proven track record of doing things responsibly,” says Roman Starns, a business consultant with the Louisiana Small Business Development Center. “[Borrowers are saying,] ‘look, I’m willing to put my home equity in, I’m willing to pledge some real estate, I’m willing to put 20 percent down in cash to make this business work.’

“That’s going to mean they are more likely to run that business well and do well at it. If someone puts nothing into it, they have nothing to lose but their credit.”

Lenders also will investigate whether the business is viable in the current market. An entrepreneur who wants to open, for example, a VHS repair shop could have a solid business plan and financial backing, but lenders likely will reject the application.

“They are going to look at the market conditions for this loan as well,” says Starns, who has 20 years’ experience as an entrepreneur and small business owner. “No one has VHS anymore. They want to see that this is a workable business and the financial projections on it show that, within reason, you’re going to be able to pay back everything and the business is going to make it. It’s not as easy as, ‘Oh, I have a great idea that’s going to work,’ and you go get a loan for the money.”

Part II: Types of Business Loans

Traditional lending institutions, such as banks, offer standard secure business loans through a simple application process. Borrowers can apply in person or online, and bank professionals will work with the borrower on the terms and amount of the loan. For applicants and businesses in good financial shape, this process can be quick and easy.

The type of business loan a borrower applies for will depend on their need for cash, financial situation and availability of collateral. Here are some options for business owners considering secured business loans.

Term loans

Term loans are best for business owners who have a specific, one-time need for cash, such as buying an expensive piece of equipment or financing a major building renovation. A term loan will provide the money up front in a lump sum, and the borrower pays it back over time. These loans typically are approved for established businesses that need extra cash to expand or enhance their services.

The length of the repayment period will depend on the purpose of the loan and the amount of collateral the borrower can offer. Until recently, term loans were offered between two and five years, but now they can be repaid in as little time as six months or as long as 25 years.

Deciding which type of term loan you need depends a lot on how soon are prepared to repay the loan.

Up to 2 years: Short-term loans

Short-term loans, which are best for paying for a pressing business need, must be paid back quickly. Terms might require daily or weekly payments, which allow the borrower to pay back the money quickly and minimize financing costs.

2 to 5 years: Medium-term loans

Medium-term loans are ideal for companies that are growing and are optimistic about their future. These loans, which usually are repaid in two to five years, allow business owners to put plans for expansion into action immediately rather than waiting to save enough money to buy equipment or other assets that will allow the business to grow. Medium-term loans can be unsecured or secured, and approval is based on the applicant’s credit score and collateral, if required.

10-25 years: Long-term loans

Long-term loans are designed for businesses that can project growth years. The amount of these loans, which have repayment terms ranging from 10 to 25 years, is dependent on the need, and they can range from several thousand dollars for a small equipment purchase up to $1 million for buying a building or property.

SBA-guaranteed loans

It is a common misconception that the Small Business Administration, a government agency that provides assistance to small businesses, loans money to businesses. Instead of making loans directly, the SBA creates guidelines for loans and then guarantees to its lending partners that their loans will be repaid.

The SBA works with several different kinds of institutions, including traditional lenders, microlending institutions and community development organizations. When a business applies for an SBA loan through one of these partners, the partner provides a loan that is structured according to SBA rules and is guaranteed by the SBA.

Because the SBA is a government organization, its rules and practices can change as government fiscal policies adapt to the current economy. It’s important to always check with the SBA for its most current policies and loan programs.

The SBA typically will not offer loans to businesses that can secure financing on their own, and it does not offer grants to new or expanding businesses. It does provide several programs to help borrowers finance different aspects of a business.

  • General small business loans: These loans, called 7(a), are the SBA’s most common loan program and can be approved for up to $5 million, although the SBA states that the average 7(a) loan for fiscal year 2015 was about $371,000. These loans are assigned low interest rates, and the SBA will guarantee as much as 85 percent of the loan up to $150,000. Seventy-five percent of loans over $150,000 are guaranteed. The loans are generally available to small businesses that do business in the United States and have already used alternative funding sources, such as personal savings.
  • Microloans: Available for startups and business expansions, SBA microloans are provided through intermediary nonprofit community organizations for up to $50,000. The average microloan is $13,000, according to the SBA, and interest rates are between 8% and 13%. Business owners usually are required to pledge collateral and a personal guarantee.
  • Real estate and equipment loans: The CDC/504 program offers loans for buying land, improving property, constructing and improving buildings, and purchasing equipment and machinery. Successful applicants will have a feasible business plan, no available funding from other sources, good character, and business projections that show an ability to pay back the loan. Loan amounts are based on how the business will use the money and how closely the business’s plan meets the program’s goals.
  • Disaster loans: When businesses suffer losses due to a declared disaster and are in a declared disaster area, SBA low-interest disaster loans are available to replace or repair real estate, personal property, inventory, business assets, and equipment and machinery damaged in the disaster. Owners of businesses of all sizes can apply online, at designated disaster recovery centers, or by mail, and the loan can be repaid in monthly payments or a lump sum. Loans can be approved for up to $2 million.

Business line of credit

A business line of credit works much like a business credit card, allowing the business to access funds as needed and make minimum monthly payments to repay the borrowed money. Through this type of lending, business owners can set their own borrowing and repayment schedules, depending on their cash flow.

Lines of credit are appealing to businesses because they are easier to obtain than standard secured loans, and the business owner does not pay interest until they withdraw money from the credit line. This type of borrowing is best for established businesses with optimistic outlooks, as struggling businesses in danger of failing may leave the owner personally responsible for unpaid debt.

Chris Kline, co-owner of a pillow manufacturing business in Bucks County, Pa., says his business recently took out a $50,000 line of credit to buy more manufacturing equipment to meet increasing demand for their products. Kline and artist Eric Fausnacht opened the business manufacturing pillows printed with Fausnacht’s artwork five years ago, and Kline helped move the business from arts and crafts shows into the wholesale market.

The application process for a line of credit included a meeting with a bank official, who visited the company on-site and talked at length with the business owners about their company and business projections.

Kline, 45, says that he prefers to borrow conservatively, and he and Fausnacht pledged business assets rather than personal assets to secure the line of credit. While unsecured lines of credit are available for maximums under $100,000, secured lines of credit typically have lower interest rates and higher credit lines.

“I’m not looking to borrow more than 10 or 15 percent of annual sales,” Kline says. “And I’m confident we will be able to pay that back if something unforeseen happens.”

The new equipment purchased with the line of credit already increased production and revenues enough that Eric & Christopher now has eight or nine full-time employees and additional part-time staff.

Equipment loans

Many businesses require expensive equipment, such as an X-ray machine or a tractor, to get started. Without revenues from the business, a business owner may not have the capital to pay for the equipment. An equipment loan, which several types of lenders offer, can help a business buy the equipment it needs to begin or expand operations.

Unlike many other types of business loans, the equipment can serve as collateral for the loan and makes the loan easier to obtain. If the borrower can’t make the payments, the lender will repossess the equipment and sell it to recoup some of its losses. Applicants for equipment loans should have good credit and cash available for as much as a 20 percent down payment.

Equipment loans typically come with low interest rates and manageable payments, making them good tools to help businesses afford expensive purchases. Business owners must pay off the entire loan, even if the loan repayment term is longer than the life of the equipment.

Invoice financing (factoring)

Invoice financing, also called invoice factoring, is an easier way for an established business owner to raise capital than with a standard secured loan. This process allows business owners to sell their outstanding invoices at a discount to a third party, which then collects on them to repay a single-payment loan issued to the business owner.

These types of loans are beneficial for business owners who need cash faster than the repayment deadline on the invoices. Invoice financing can cover cash flow gaps and payroll, for example, and it is low risk because the money comes from completed sales rather than sales projections. The downside is that invoice financing requires substantial fees.

Inventory financing

Businesses that depend on a steady flow of inventory can use inventory financing to keep their shelves stocked or to buy more inventory for seasonal sales increases. Inventory financing also can help small businesses with cash flow during periods of slow sales.

Inventory financing provides a revolving line of credit that business owners can draw on as needed. The business owner pledges existing inventory as collateral for the loan.

Part III: How to Secure Your Business Loan

There are several ways to secure a business loan. You can use hard assets for collateral, like a house or a boat; paper assets, like investments and savings accounts; or your own inventory and invoices. We’ll dig into types of ways to secure your business loan here.

Securing your business loan with collateral

If you or your business has significant assets, you likely are a good candidate for a secured business loan. Lenders will consider the amount of collateral you have when deciding on your loan application, as they want to reduce their risk in case you can’t repay your loan. If you default, lenders will take possession of collateral and sell it to regain at least some of the money they lent you.

This is where risk can come in. While your business may be secure when you apply for the loan, downturns in the market or other unexpected events may push a business into hard times. For example, if an unsavory business moves in next door, your customer traffic may slow significantly. If a machine breaks down or needs to be replaced, production could be slowed and orders unfulfilled. Theft and natural disasters that destroy your business’s property also can severely reduce revenues and lead to unexpected expenses.

If unforeseen circumstances result in a business owner being unable to make loan payments, the lender can seize collateral. As a result, a business owner can lose their house, their car or their savings. If the collateral is property belonging to the business, seizure can be just as devastating, and losing significant business assets can cause the business to close.

The payoff for a secured loan, though, will be more flexible loan terms and significant financial savings over time. Borrowers with secured loans will pay lower interest rates and fewer fees, and they may not be penalized for paying off the loan early.

Hard vs. paper assets

Lenders typically will accept personal and business assets, which a business owner can pledge as collateral if they want to protect their personal property. Either way, borrowers must promise the lender something valuable that can easily convert to cash in the case of default to recoup losses.

Borrowers can pledge two types of collateral: hard assets and paper assets. Hard assets include houses, vehicles, boats and land, while paper assets include stocks, savings, investments, insurance policies and bonds. Lenders also will happily accept cash accounts as collateral, but they will not consider retirement accounts, such as 401(k) plans.

Business assets that qualify as collateral include inventory, insurance policies, accounts receivable, machinery and equipment, and unpaid invoices.

Some lenders may attach a blanket lien to a loan as collateral, and borrowers should be aware of the sweeping consequences this can have if the loan goes into default. Blanket liens give lenders a legal claim to all of your assets, business or personal, if you stop making loan payments.

Securing your business with a personal guarantee

In many cases, borrowers will be asked to provide a personal guarantee for a secured business loan. This requires the signatures of all principal owners, ensuring that they have assets they can put up as collateral. While the signatures are on unsecured promises, a personal guarantee does allow the lender to take signers’ assets if the loan is not paid. If you don’t have enough assets to personally guarantee a loan, business consultant Starns recommends finding a business partner who does.

Personal guarantees are different from collateral in that they give lenders access to a wide range of assets, while collateral typically specifies assets the lender can seize in case of nonpayment.

It’s important to know what you’re signing when offering a personal guarantee. If you do default on the loan, the lender may release you from the personal guarantee if you ask, and you also could try to arrange with the lender to first sell business assets to satisfy the outstanding debt before they seize your personal assets.

Part IV: Shopping for a Secured Business Loan

Borrowers can apply for secured business loans at several types of financial institutions. Banks and credit unions offer standard application procedures that include filling out an application in person or over the phone, discussing terms and the loan amount with a loan officer, and working with a business specialist to access funds if the loan is approved.

Business owners can apply for SBA loan programs through partner lenders, which can include banks and community organizations that work within SBA guidelines. Borrowers will need to download and complete an SBA loan application and be prepared to submit documents such as personal background and financial statements, business financial statements, and income tax returns. A list of SBA lenders is available on the agency’s website.

Online lenders typically have faster application processes and can get money to borrowers quickly, but they often come with higher interest rates than traditional lenders. Some online lenders often charge origination and monthly maintenance fees as well.

To compare offers from multiple business loan lenders, check out MagnifyMoney parent company LendingTree.com.

LendingTree

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

Do your research

Before business owners begin shopping for a secured business loan, financial advisers recommend realistically assessing their business’s economic situation. Secured business loans come with great personal risk, as a failed business and inability to pay off a secured loan can cost a business owner significant personal or business assets. Online calculators can help borrowers estimate potential monthly payments and make good decisions about what amount of loan they can afford.

Bob Burton, a retired businessman who now volunteers as a mentor for the Charlotte, N.C., office of SCORE, a national organization that provides mentoring and education to small business owners, says he makes sure that clients understand the economics of their idea for a business.

“They have to make the call whether they want to put their money in it,” Burton says. “A lot of people don’t understand what’s involved in starting a business. It sometimes can look very simple, but it can be quite complex.”

Starns advises borrowers to think through how realistic their plan is, including whether they are truly committed to the endeavor and have enough experience to execute it, before taking on a secured loan.

“You’re risking a lot of things,” he says. “Owning your own business is rewarding, but it’s also risky and takes a special mentality to be able to do it.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Marty Minchin
Marty Minchin |

Marty Minchin is a writer at MagnifyMoney. You can email Marty here