Key Takeaways
- A secured business loan is a type of loan that requires the borrower to put up an asset as security. This gives the lender peace of mind that they can get their funds back if the borrower doesn't pay back the loan.
- Secured term loans, equipment finance, commercial property loans, and invoice finance are all common types of secured business loans.
- Depending on how much your property is worth, secured business loans can help you get lower interest rates, longer terms, and bigger loans. Getting better terms is very good for your business, but be careful of the risks if you don't pay.
- If you can't pay back the loan, the lender can legally take your asset and sell it to get the money back. Before applying, it's important to think about the good and bad points.
- The process for getting a secured loan varies from lender to lender, but most will ask for business financials, proof of ownership of the asset, and specific information about the asset. The lender will check the property and determine the value, which usually takes at least a day.
If you’re looking for financing, chances are you’ll encounter secured loans as one of the most common choices available. Understanding how secured loans work is important for any Australian small and medium business wanting to invest in major assets or to get access to lower interest capital for any business purpose. This quick guide will help you learn the basics of secured loans and how to apply for them.
What is a Secured Loan?
A secured loan is one in which the borrower gives the lender an asset they own as security. When you apply for a business loan, you can use commercial or residential properties, machinery, equipment, invoices, or any other important business asset as security. If the borrower doesn’t pay back the loan, the lender can legally take the asset and sell it to make up for their losses.
Because of this, secured loans tend to have:
- Lower interest rates and fees
- Higher borrowing limits
- Longer repayment periods
Common Types of Secured Business Loans
Some of the most common secured loan products for Australian small businesses include:
- Secured Term Loans – A term loan is one of the most basic forms of financing. The borrower receives a lump sum of money upfront and agrees to pay it back, along with interest, over a fixed period of time. A secured term loan requires the borrower to offer assets as a security to the lender.
- Commercial Real Estate Loans – This is a type of financing where the commercial property you are purchasing serves as the security for the loan. If your business is buying a commercial space for use or investment, this is the type of loan for you.
- Equipment Finance – Equipment financing, particularly chattel mortgage, allows you to get funds for the upfront purchase of business equipment. For this type of financing, the equipment serves as security.
- Invoice Finance – This type of financing allows you to borrow against the value of outstanding customer invoices, utilising your accounts receivable as security.
Weighing the Risks and Benefits
It’s important to think about the good and bad sides of getting any kind of secured loan. The best thing about a secured loan is that you can get better terms, like lower interest rates, longer repayment periods, and higher borrowing limits (depending on how much your security is worth). The lender is more likely to approve your loan because there is less risk for them. A secured loan is a great way to get low-cost funds if you have unencumbered assets you can easily use as security.
This kind of loan does have some risks, though. If you can’t make your payments on time, the lender can start the legal process and take your property. At that point, they’ll sell the asset and use the money to pay off the rest of the debt.
Applying for a Secured Loan
For a SME to get a secured loan, they, their directors, or their guarantors must own or be buying security assets that are worth the same or more than the loan amount they want. The lender’s requirements and application process are different, but they usually include the following:
- Providing documents, such as business financials, business activity statements, and ATO tax returns
- Providing information on security type, condition and estimated value
- Submitting documents like asset titles/deeds as proof of ownership
- Getting the asset appraised or verified by the lender
Lenders will check an SME’s credit profile, annual revenue, time in business and other factors too. But security coverage is one of the most important approval requirements.
Using Secured Loans Responsibly
Secured loans are excellent ways to get funds for big purchases and for running and growing your business. But you shouldn’t take the risk of putting that security on the line lightly.
Lenders prefer secured loans because they are less risky and less expensive. However, if you don’t pay back the loan, your most important business assets are at risk. Always have a good plan for how to use the funds from a secured loan wisely while still being able to make all of your scheduled payments. Also, use the cash you save by getting a low-interest loan to build up emergency funds so you can always make payments, no matter what happens.
Find Secured Loans with the Help of Loan Experts
We at Dark Horse Financial can help connect you with the best lenders offering the best rates and terms. With expert help, you can get the funds you need to reach your business goals. Reach out to us today.
Disclaimer: Loans and the benefits associated with them are only available to those who have been approved. The information provided on this page is general and does not consider your individual circumstances. It is not meant to serve as a substitute for professional advice, and you should not rely on it for any decisions. Always consult with a professional regarding finance, tax, and accounting matters before making any choices or taking action.
