How Secured Business Loans Work

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Key Takeaways

Key Point	Description
Definition	A secured business loan is a type of financing that requires the borrower to put up an asset as security. This assures the lender that they can recover the loan amount in the case of default.
Common Types of Secured Business Loans	Common types of secured business loans include secured term loans, equipment finance, commercial property loans, and invoice finance.
Weighing the Risks and Benefits	Secured business loans can help you obtain lower interest rates, longer terms, and higher loan amounts depending on the value of your property. Securing better terms is highly beneficial for your business, but be wary of the risks in case of default. If you can no longer repay, the lender can legally seize your asset and resell it to recover the loan amount. It’s crucial to weigh the pros and cons before applying.
Applying for a Secured Loan	The application process for a secured loan differs depending on the lender, but generally, lenders will ask for business financials, proof of ownership of the asset, and specific information about the asset. The lender will verify and value the property, which usually takes at least 24 hours.

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 where the borrower pledges an asset they own as security to the lender. For business loans, accepted assets are usually commercial or residential properties, machinery, equipment, invoices, but can include any other significant business asset. If the borrower defaults and cannot repay the loan, the lender can legally take possession of the asset and sell it to recoup their losses.

The key difference between secured and unsecured loans is that piece of security backing up the debt. For that reason, 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

When applying for any type of secured loan, it’s important to weigh the pros and cons. The main benefit of a secured loan is getting better terms overall, such as lower interest rates, longer repayment periods, and higher borrowing limits (based on the value of your security). Since there’s less risk for the lender, they are also more likely to approve your loan. If you have unencumbered assets that you can comfortably use as security, a secured loan is a great way to obtain low-cost financing.

Of course, this type of loan also has its risks. If you can’t keep up with repayments after a defined period, the lender can commence the legal process and take possession of your property. At that point, they’ll sell the asset and use proceeds to cover the outstanding debt balance.

Applying for a Secured Loan

To qualify for a secured loan, SMEs, their directors or guarantors need to possess or be purchasing security assets worth equal or greater value than the desired loan amount. The requirements and application process differ depending on the lender, but typically involve 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 as well. But security coverage is one of the most important approval requirements.

Using Secured Loans Responsibly

Secured loans are useful financing tools that can help you invest in major assets and get capital for business operations and expansion. However, putting that security on the line isn’t a decision to be taken lightly.

While secured loans are lower-risk and lower-cost for lenders, defaulting puts your critical business assets directly at stake. Always have a sound strategy in place for using secured loan funds productively while comfortably covering all scheduled payments. Additionally, take advantage of the savings from having a low-interest loan by building up contingency funds so you can always make repayments 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.

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Case Studies

Case Study: $1.1M Private Loan to a Commercial Construction Business

Prior to COVID, our client had a thriving commercial plumbing business. Like many in the industry, the pandemic hit hard, with reduced contracts and delayed payments leading to financial strain. However, as the market picked up again post-COVID, their numbers began improving steadily. Still, the burden of the pandemic remained in the form of costly, self-sourced loans that created a significant drain on their cash flow. On top of this, the business had accumulated $1M in tax debt. The client was faced with two potential solutions: consolidate their existing debts into a more manageable loan or consider restructuring the business entirely. With the future looking brighter for their business, consolidation became the preferred choice. Their turnover and cash flow were strong enough to support a $1.1M unsecured loan over five years. However, while loans of up to $250,000 can sometimes be obtained without the need for extensive documentation, larger loans – particularly unsecured ones – typically require financials. The company’s financials had taken a hit during the pandemic, and with losses on the books, the unsecured option was off the table. The Tailored Solution: Secured Loan with Capitalised Interest Recognising these challenges, we adopted a two-step approach to provide the client with the financial relief they needed. First, we secured a $1.1M first mortgage loan, backed by property as collateral. By securing the loan against property, we were able to access a more flexible and favourable lending option that allowed the business to maintain liquidity. One of the key features of this solution was the decision to capitalise the interest on the loan. This strategy meant that the interest accrued on the loan was added to the loan balance rather than requiring regular interest payments to be made. For the client, this provided two key benefits: Cash Flow Relief: By capitalising the interest, the client was able to redirect their available cash flow to more pressing business concerns, including paying down their $1M tax debt. This approach allowed them to stabilise their financial situation without the immediate strain of servicing both the tax debt and the loan simultaneously. Flexibility for the Future: The capitalised interest approach also created breathing space for the business to recover from its pandemic-related losses. By the time the interest needs to be repaid, the business is expected to be on even firmer financial ground, with stronger cash flow and better financials. This would enable them to refinance the loan or even explore unsecured lending options once their financial situation improves. Why This Loan Was the Right Fit In this case, the combination of a first mortgage loan with capitalised interest was crucial in allowing the business to address its immediate challenges while providing room for future growth. Here’s why this was the ideal solution: Secured Loan with Lower Interest Rates: By securing the loan against property, the business was able to access a loan with a lower interest rate than would have been possible with an unsecured loan. This ensured that the overall cost of borrowing was manageable, despite the larger loan amount. Avoiding ATO Enforcement: The capitalisation of interest gave the business the breathing space it needed to focus on paying off its tax debt. This is significant because it helped them avoid any potential enforcement action by the Australian Tax Office (ATO), which could have included garnishing accounts or placing liens on assets. By proactively managing the tax debt, the business was able to maintain control over its financial future. Improved Financial Outlook: The structure of the loan was designed to align with the company’s projected financial recovery. With turnover increasing and cash flow stabilising, the business is expected to be in a much stronger position within a year. At that point, they will be far enough removed from the loss-making pandemic years to consider refinancing the loan or transitioning to an unsecured option with more favourable terms. Key Benefits of This Approach Preserving Cash Flow: Capitalising interest allowed the business to preserve its cash flow for day-to-day operations and critical payments like tax obligations, which was vital to its continued operation and recovery. Future Flexibility: This strategy provided the client with a clear pathway to financial recovery. After one year, the business could refinance the loan under more favourable terms or secure unsecured financing once they’ve demonstrated improved financials. Tailored Solution for Unique Challenges: This loan was structured with the unique challenges of the business in mind. The post-COVID recovery created an opportunity for growth, but also highlighted the need for a financing solution that wouldn’t strain the business’s resources. A first mortgage, combined with capitalised interest, was the perfect balance between providing necessary capital while keeping short-term obligations low. Strategic Debt Management: By choosing consolidation over restructuring, the business retained full control over its operations while addressing its debt obligations. This solution also ensured that their tax debt was managed, reducing the risk of future penalties or enforcement action. In conclusion, this case study demonstrates how a strategically structured loan – even a secured one – can create substantial value for a business, especially when navigating a post-crisis recovery. At Dark Horse Financial, we understand the need for tailored financial solutions that don’t just solve problems but also enable businesses to thrive in the long term. Related posts: Case Study: An Unsecured Business Line of Credit Can you consolidate your business debts? (A Case Study) Increase Supply Chain Efficiency with Trade Finance Case Study: $75k Overdraft Limit + $40k Capital Raise Secured Against Equipment (No Property Security)

30 September 2024

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Blog

Financing for Doctors: Medical Business Loans, Personal Loans, and more

Key Takeaways Doctors are considered low-risk borrowers by many lenders. Thus they have access to a wide range of financing options with competitive interest rates, flexible terms, and high loan amounts to support both business and personal financial needs. Some reasons why doctors need loans include purchasing commercial property, purchasing equipment, securing working capital, debt consolidation, further education, and more. Medical business loans are versatile loan products that can cover a range of business expenses, including staffing, marketing, and emergency expenses. Medical practice loans are ideal for doctors looking to acquire, expand, or renovate a medical practice. Medical equipment loans are for purchasing or leasing medical equipment, and helping doctors stay up-to-date with the latest technology without draining working capital. Doctors can access personal loans for managing personal expenses, debt consolidation, home improvements, or continuing education. As a medical professional, assess your needs and carefully compare lenders before committing to a loan. Doctors face unique financial needs, whether they are setting up their medical practice, expanding it, or purchasing new equipment. Fortunately, various tailored financing options are available to healthcare professionals. Understanding these loan types can help you secure the right kind of funding for your medical business or personal financial goals. Let’s explore the types of loans for doctors, including medical business loans, medical equipment loans, and more. Get a quote Why Doctors Need Financing Doctors often need financing for a variety of reasons, both for professional and personal needs. Some of the most common reasons include: Starting a New Practice: Setting up a new medical practice involves significant upfront costs, including leasing office space, purchasing equipment, and hiring staff. Financing helps cover these initial expenses. Expanding or Renovating a Practice: As patient numbers grow, doctors may need additional space, more advanced technology, or enhanced facilities, which require substantial capital. Purchasing Medical Equipment: Medical equipment, such as diagnostic machines, surgical tools, or patient management software, can be expensive. Equipment loans allow doctors to finance these purchases without depleting their cash reserves. Practice Acquisition: Many doctors buy existing practices or partner with other healthcare providers, which often requires financing for the acquisition costs. Working Capital Needs: Running a medical practice involves ongoing expenses like payroll, utilities, and supplies. Financing helps ensure smooth cash flow, especially during periods of irregular income. Debt Consolidation: Personal or business debts can be consolidated through loans with lower interest rates, helping doctors manage their finances more effectively. Continuing Education or Certifications: Doctors often need to pursue ongoing education to stay current in their field. Financing helps cover the cost of courses, certifications, or attending professional conferences. Types of Loans for Doctors Doctors in Australia can access a number of loans to address their needs, whether for their practice or for personal purposes. Here are the most common ones: 1. Medical Business Loans Medical professionals can explore general business loans for any needs concerning their medical business. These loans can cover common costs like working capital, inventory purchases, marketing, hiring, and more. Types of Business Loans for Doctors: Secured Business Loans: Doctors can opt for secured loan options for any business purpose. If you need long-term financing and have significant assets to use as security, you can go for a secured loan. This is best for more significant costs like business expansion. Unsecured Business Loans: If you need a quick source of funding with minimal requirements, you can go for unsecured business loans. These loans are more short-term and can be approved as fast as 24 hours. Business Line of Credit: A renewing line of credit can help doctors manage the daily operations of their business, including paying for payroll, utilities, emergencies, and more. A line of credit has a predetermined limit you can draw from at any time. When you repay, the limit resets. You only need to pay interest on the borrowed amount, not the full limit. 2. Medical Practice Loans If you’re focused on the specific needs of starting or expanding a medical practice, you can go for specific loans that address those needs. Medical practice loans help doctors acquire or upgrade their practice with minimal hassle. Why Opt for a Medical Practice Loan? Whether you’re buying into an existing practice or establishing your own, the upfront costs can be significant. Medical practice loans are tailored to help doctors cover costs like: Purchasing Property: If you’re starting from scratch, the cost of a commercial or office space can be your biggest expense. The right loan can cover this cost. Acquiring an Existing Practice: If you’re buying an existing practice, it requires significant capital to do so. Medical practice loans can cover the purchase price. Renovations and upgrades: If your practice needs modernisation or expansion, these loans provide the necessary funding. Common Types of Loans for Acquiring and Upgrading a Medical Practice Commercial Property Loans: Medical professionals can access commercial property loans for the specific purpose of buying commercial space for their practice. These loans can cover the purchase or building of a commercial space. Fitout Finance: These are loans tailored specifically for the improvement of a space’s interiors, including electrical, plumbing, lighting, structural, and interior design. 3. Medical Equipment Loans The medical field is technology-driven, and keeping up with new advancements can be expensive. That’s where medical equipment loans come in. These loans help doctors finance the purchase or lease of medical equipment without depleting their working capital. What Is Equipment Finance? Equipment loans are designed specifically for the purchase of business equipment. For healthcare professionals, this type of financing is used to purchase advanced medical technology and equipment. These loans allow doctors to spread the cost of expensive machinery, diagnostic tools, or even general practice equipment over time. Benefits of Medical Equipment Loans Get Immediate Access to Equipment: With equipment finance, doctors can get medical equipment immediately, allowing them to provide better patient services sooner. Preserve Working Capital: Instead of paying for equipment upfront, you can spread the cost over a fixed period. Access to Cutting-Edge Technology: Stay competitive by

25 September 2024