Nonprofit Financial Hub
Cash Secured Loans: What They Are, How They Work, and When to Use Them
When organizations or individuals look for financing, they encounter many different loan products. One option that often stands out is the cash secured loan. While the name sounds straightforward, many borrowers are surprised to learn how this type of loan actually works, and what its limitations can be.
This guide provides a comprehensive overview of cash secured loans: their structure, advantages, disadvantages, and scenarios where they may (or may not) be the right fit.
What Is a Cash Secured Loan?
A cash secured loan is a loan backed by the borrower’s own cash. Instead of using property, equipment, or investments as collateral, the borrower places cash into a dedicated savings account or certificate of deposit (CD). The lender then issues a loan based on that amount, usually for 90% to 100% of the deposit.
In essence, you are borrowing against money you already have. While this can sound counterintuitive, it can serve a purpose in certain financial situations.
How Cash Secured Loans Work
The process of a cash secured loan typically follows these steps:
- Cash Deposit – The nonprofit borrower deposits money into a savings account or CD with the lending institution.
- Loan Approval – The lender issues a loan for a percentage of the deposited cash – usually 90%-100%.
- Collateral Hold – The cash remains restricted as collateral until the loan is fully repaid.
- Repayment – The borrower makes regular loan payments with interest, just like with any other loan.
Here is an example of how a $100,000 Cash Secured Loan works
You Deposit Your Cash
- You place a set amount of your own funds into a secure account with the Lender, for example, $100,000.
- This cash remains yours and serves as collateral for the loan.
You Get Immediate Access to Additional Capital
- Based on your $100,000 deposit, the Lender immediately provides you with a $100,000 loan.
- You now have $200,000 in total capital to work with — your deposit plus the loan proceeds.
You Use the Loan for Your Needs
- You can use the loan funds for operations, programs, growth, or other strategic initiatives — without touching your original deposit.
You Pay Back the Loan Over Time
- As you make scheduled repayments, your deposit remains safe in the secured account.
You Get Your Original Cash Back
- Once the loan is repaid, your $100,000 deposit is returned to you.
Benefits of Cash Secured Loans
While cash secured loans may seem unusual at first glance, they do have clear benefits for certain borrowers.
- Easier Approval
Because the loan is fully backed by cash, lenders are far more likely to approve it, even if the nonprofit borrower has limited credit history or weaker financial standing.
- Credit Building
On-time payments made toward a cash secured loan are reported to credit bureaus. This can help nonprofits strengthen their credit profile over time.
- Predictable Terms
These loans usually come with competitive fixed interest rates and repayment schedules, making budgeting easier.
- Quick Access to Funds
Cash secured loans are often processed faster than other types of credit since the collateral is simple and already in place.
Drawbacks of Cash Secured Loans
While cash secured loans provide certain advantages, they also come with certain limitations that borrowers should carefully consider.
- Ties Up Cash
The deposited money is restricted until the loan is repaid, which reduces liquidity.
- Limited Financial Benefit
Because you’re borrowing your own money, you are not truly accessing new capital. Instead, you’re paying interest to use funds you already have.
- Interest Costs
Even though the loan is fully secured, lenders still charge interest. Over time, this can add up to significant costs.
Who Should Consider a Cash Secured Loan?
Cash secured loans aren’t for everyone, but they can be useful in specific scenarios:
- Credit Building – If your credit history is thin or damaged, using a cash secured loan responsibly can improve your credit score.
- Proof of Creditworthiness – Borrowers planning for future financing may use a cash secured loan to establish a track record with a lender.
- Temporary Bridge – For short-term needs, cash secured loans can provide a quick solution while preserving a relationship with a financial institution.
When Does a Cash Secured Loan Make Sense?
A cash secured loan may work if:
- Your nonprofit has cash but wants to build credit history.
- You need a loan quickly and have no other collateral to pledge.
- You want to show lenders a track record of repayment for future financing needs.
Cash Secured Loans vs. Other Loan Types
To fully understand cash secured loans, it’s helpful to compare them to other common loan products.
Cash Secured Loan vs. Unsecured Loan
- Cash Secured Loan – Requires a deposit of your own money as collateral.
- Unsecured Loan – Based on creditworthiness and cash flow, with no collateral required.
Cash Secured Loan vs. Collateralized Loan
- Cash Secured Loan – Uses cash as collateral.
- Collateralized Loan – Uses property, investments, or equipment as collateral.
Cash Secured Loan vs. Credit Card
- Cash Secured Loan – Offers a lump sum with fixed repayment terms.
- Credit Card – Provides a revolving line of credit, but often with much higher interest rates.
Key Questions to Ask Before Taking a Cash Secured Loan
If you’re considering a cash secured loan, reflect on the following:
- Do you need to build or repair credit, or are there other financing options available?
- Will locking up cash reserves create financial strain?
- Is the interest cost justified compared to alternative financing methods?
- Could your cash be put to better use if invested or applied directly to your needs?
Asking these questions ensures that a cash secured loan serves your overall financial strategy rather than limiting your flexibility.
Final Thoughts
A cash secured loan is a unique financial product that allows borrowers to leverage their own cash as collateral. While it is not going to be the first choice for most nonprofits it is part of a menu of loan options available, and in certain circumstances can be a good option for your nonprofit. For those who need to build credit or demonstrate reliability to lenders, it can be a useful interim solution.
About B Generous
B Generous is the #1 lending marketplace in the U.S. exclusively for nonprofits. We connect mission-driven organizations with bank and non-bank lenders, providing fast, fair, and fully tailored loan options. Trusted by thousands of nonprofits nationwide, B Generous makes it easier for nonprofit organizations to access the capital they need to bridge funding gaps, expand programs, and keep their missions moving forward.
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