Key Takeaways
- Secured loans require properties or other assets as security but offer lower rates, higher amounts, and longer repayment terms.
- Unsecured loans do not require security and can be quick and simple to obtain, but they usually come with higher rates.
- Consider your credit profile, financing needs, ability to pledge assets, and growth stage when applying.
Running and growing a business is something many Australians find fulfilling. However, doing so can require a lot of capital. From working capital requirements to investment in expansion, people and equipment, many business owners turn to commercial loans to help manage their cash flow and grow their business.
As a business owner seeking funding, you will likely have to choose between secured and unsecured loans. These two choices have key differences that will serve different situations. Let’s discuss these differences and determine which one is better for you.
Understanding the Differences
What exactly is the difference between a secured and unsecured loan? It mostly lies in security. For lenders, security gives them a safety net that protects them in the case of default. The presence of (or lack of) security affects the terms the borrower gets. Let’s take a closer look:
Secured Business Loans
These types of loans require the borrower to provide some form of security against the loan amount. Common forms of security include:
- Commercial property
- Residential property
- Business equipment or inventory
- Vehicles or other assets
- Accounts Receivable
If the borrower defaults on repayments, the lender can legally take possession of the security and sell it to recover the outstanding debt. Since the lender is protected, they can provide the borrower with better overall terms.
Unsecured Business Loans
In contrast, unsecured loans often have no associated security. Instead, lenders assess applications based on the borrower’s credit score and historical cash flow through the business bank account. Unsecured business loans are great for those who don’t have or are unwilling to use significant assets as security. They are also quicker to obtain, which is ideal for those who need funds fast.
Advantages and Disadvantages of Each Option
Both secured and unsecured business loans have their pros and cons that may suit different scenarios:
Secured Loans
Advantages
- Lower interest rates
- Higher maximum loan amounts
- Longer repayment terms available
Disadvantages
- Risk of losing security assets
- Slower approval and funding process
- Less flexibility when it comes to your assets
Unsecured Loans
Advantages
- No security needed
- Fast application and funding
- Retains future borrowing power
Disadvantages
- Higher interest rates
- Lower maximum loan amounts
- Shorter loan terms
How to Choose Between Secured and Unsecured Business Loans
Here are some key factors to weigh up when deciding whether a secured or unsecured loan is best:
Loan Purpose and Amount
What exactly do you need the funds for? Secured loans can be good for larger investments like business expansion or inventory purchases. In the case of buying commercial properties and equipment, the asset being bought is generally used as the security for the loan. Meanwhile, unsecured loans can work better for smaller, short-term needs.
Available security
Director’s property and business vehicles, plant and equipment can be used for security if available. If not available, you can get funding through an unsecured loan.
Company Life Stage
Younger companies with just a few months of operations most probably can’t meet unsecured loan criteria. Even when they do, options with reasonable rates aren’t usually available until after 12 months of trading. Many non-bank lenders offer secured options for startups and young businesses so they can build their credit profiles. These include secured term loans, equity release, equipment finance, and private lending.
Willingness to Risk Assets
When you apply for a secured loan, there’s always a risk of losing your valuable asset. Many businesses lose the capability to repay loans due to economic and personal issues. If that happens, will your business survive the loss of your asset?
Future Borrowing Plans
Securing current debts against assets could limit your borrowing flexibility further down the line. Think about your business plans and what type of funding you will need in the future to make them happen.
When Secured Loans Make Sense
In general, secured business loans are recommended if:
- You need to borrow larger amounts
- You require affordable, long-term financing
- You have significant assets to use as security
- You don’t mind encumbering assets
When Unsecured Loans Are Better
An unsecured business loan makes more sense if:
- You’re using funds for short-term working capital
- You have limited assets or can’t risk security
- You need funds immediately
- Business financials are less-than-ideal
To Sum it Up
For many businesses, a balanced approach using both secured and unsecured financing across different stages makes the most sense. The key is choosing loan products carefully so that they’re aligned with your unique situation.
With some preparation and diligent research, you can find a loan solution that provides capital for success. Seeking advice from experienced loan experts can ensure you make the right choice.
Reach Out to Loan Experts About Secured and Unsecured Loans
Our team of experts know business loans inside out. We’ll help you find tailored solutions so that your business can achieve its goals. Whether you have significant assets or not, we can direct you to the right loan to position your business for success.
