How to Leverage Real Estate to Reduce Payments on Unsecured Loans

In an ideal world, business expenses would be predictable and consistent. The reality is that equipment can fail unexpectedly, long payment cycles can create cash flow problems, and expanding to meet demand requires more capital than you can scrape together overnight. 

There are more ways to finance your business needs than high-interest, unsecured loans such as merchant cash advances (MCAs). To prevent difficult debt cycles that eat into your working capital (and your profits), it’s worth taking the time to assess your options. If you own real estate, you may be able to leverage it as collateral for more favorable terms or to reduce payments on existing unsecured loans.

Secured vs. Unsecured Business Loans

For commercial loans, your business needs and personal circumstances will play a significant role in determining which financing is best. Thankfully, there are plenty of options whether you’re looking for a lump sum of capital or access to funds as needed—even if your business is newly established or you have poor credit. Some, such as hard money loans, are secured by real estate and benefit from lower interest rates and extended repayment periods compared to an MCA.   

What are unsecured loans? 

Unsecured loans offer financing without collateral. Instead, lenders evaluate the application based on the financial standing and creditworthiness of the borrower.  

These can include term loans, business lines of credit, MCAs, and invoice factoring.

Key Considerations

• Collateral isn’t required, so there’s also no risk of losing business assets. 
• Borrowers typically have faster access to funding (within days) and short-term repayment periods.
• Interest rates are higher, and loan amounts are smaller due to increased risk for the lender without an asset to secure the loan.
• Unsecured loans may be the only option to finance the capital your business needs without assets to pledge as collateral. 
• Loan terms are heavily dependent on the borrower’s financial standing, which can be a benefit as much as a disadvantage. 
• Some unsecured financing options, such as MCAs, lack federal regulations. This can result in confusing contracts that lack transparency. 

What are secured loans? 

Secured loans require that an asset be pledged as collateral to demonstrate financial commitment and distribute risk between both the borrower and lender. With secured financing, there is a greater focus on equity over credit standing, though qualifications will vary with each lender. 

Collateralized business loans can include Small Business Administration loans, term loans, private money loans, business lines of credit, inventory financing, invoice financing, and equipment financing. 

Key Considerations

• These loans offer competitive interest rates and greater access to funding with high-value business assets to offset risk to the lender. 
• Repayment periods are generous, allowing for sustainable, long-term debt management. 
• Terms are influenced by the value of collateral, making financing accessible to borrowers with limited financial history or less-than-perfect credit. 
• Secured loans can help businesses establish or rebuild credit.  
• There is a risk of losing assets. Lenders can repossess collateral if the borrower defaults on payment. 
• Funding may take longer (weeks to months) to close, depending on the loan type and size. 
• Hard money lenders may be able to issue a quick close to resolve an unsecured loan. When an unsecured loan comes due, there are often penalties that can harm a business. A turbo close can enable repayment in fewer than five days. 

Benefits of Using Real Estate to Lower Loan Interest

If unsecured loans are compromising your ability to manage operating expenses and plan for new business, secured loans with real estate can allow you to refinance or consolidate debt at a lower rate. 

Let’s explore some specific ways that benefits you:

• Improved risk assessment: Pledging property as collateral increases the loan-to-value ratio and changes the level of risk associated with lending to your business. 
• Competitive loan terms: Lenders view asset-based loans as less risky because they have a way to recover capital in the event of default. They underwrite more favorably and offer more generous terms and interest rates to account for your financial commitment. Some lenders will even offer interest-only terms to further lower your payments. 
• Extended repayment schedules: Leveraging property can significantly reduce monthly payments. Schedules are informed by the new level of risk and collateral. Amortized options, which can lengthen your repayment schedule up to 20 years, may be available. 
• Increased funding potential: The value of your real estate will raise the ceiling of capital you’re eligible to receive. Additional capital empowers you to accelerate growth, expand, restructure debt, or meet any number of business needs. 

How to Secure a Real Estate-Backed Business Loan

To secure a loan, follow these five steps:

1. Assess loan needs and real estate value. 

Determine the type of loan structure, distribution, and terms you’re looking for and the value of your property.

2. Research lenders. 

Prioritize those that offer real estate collateral loans, such as a home equity line of credit or hard money. Look for lenders with a good reputation and experience in hard money business loans.

3. Prepare documentation.

Gather your property title, financial statements, and a detailed plan demonstrating your business’s need. The more compelling you can make your case, the better your chances of securing a loan. 

4. Submit your applications. 

Apply with multiple lenders to secure the best possible terms and position yourself to negotiate.

5. Negotiate. 

Inquire about interest rates, repayment schedules, and any associated fees or penalties. While it may not feel like you have many cards to play, private lenders may be more flexible than you think—especially if you have multiple offers to consider. 

Gain Financial Security with Socotra

Real estate assets can secure the future of your business. No matter what type of loan you need, a lower interest rate will keep more money in your pocket to focus on priorities. Socotra Capital has the experience to help you evaluate financing options and answer any questions you may have about leveraging property for loan reduction. 

Discover which hard money loan is right for you and the advantage of working with a direct private lender.