How Secured Business Loans Work

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.