Key Takeaways
| Key Point | Description |
|---|---|
| Definition | Secured loans require business assets or the director’s or guarantor’s personal property to serve as security for the loan. These types of loans are generally more flexible than unsecured loans and can be offered by both banks and non-bank lenders. |
| Benefits of Secured Loans | The primary advantages of secured loans are lower interest rates, longer terms, higher loan amounts, and solutions are available to those with perfect or less-than-perfect credit scores. |
| Risks of Secured Loans | Secured loans may take longer to approve, so they may not be the best choice if you need a fast loan. They also don’t offer a lot of flexibility when it comes to your assets. In the case of a default, the lender can sell your security to recoup losses. |
| Factors to Consider | When considering a secured loan, ensure that your asset has complete ownership documents and is valuable, non-perishable, in working condition, and sellable. Read through and compare different rates across lenders and other loan types to ensure you’re making the right choice. |
A staple among financing solutions, secured loans help Australian businesses obtain funding for larger expenses, such as the purchase of real estate and business expansion.
This guide is intended to help you gain a better understanding of the pros and cons of secured loans so you can make informed decisions when it comes to your financing.
What Are Secured Loans?
What is secured debt? A secured loan is a type of financing where a property or an asset is security for the loan. This asset reduces the lender’s risk in case the borrower defaults on repayments. While lenders will typically work with borrowers in default, if unable to make repayments a lender can take possession of the loan’s security and sell it and recover their losses.
Secured loans are suitable for significant business expenses, such as:
- Commercial real estate
- Business Vehicles
- Inventory
- Plant and machinery
- Expansion of operations
- Business acquisition
- Marketing and advertising
- Research and development
- Capital Raises
Pros of Secured Loans
1. Lower Interest Rates
One of the most significant advantages of secured loans is typically lower interest rates compared to unsecured loans. By providing security, businesses reduce the lender’s risk exposure, which typically translates into more favourable interest rates. This can result in substantial savings over the loan’s lifetime, making secured loans an attractive option for businesses seeking to minimise borrowing costs.
2. Higher Loan Amounts
Secured loans often allow businesses to access larger loan amounts depending on the value of your property. Lenders can be more willing to extend higher credit limits when they have security backing the loan. This can be particularly beneficial for businesses seeking substantial financing for major investments, expansions, or acquisitions.
3. Longer Repayment Terms
Secured loans frequently offer longer repayment terms, enabling businesses to spread out their loan repayments over an extended period. This can be advantageous for business cash flow.
Cons of Secured Loans
1. Risk of Security Loss
Perhaps the most significant disadvantage of secured loans is the risk of losing the security asset if the business defaults on repayments. Lenders have the legal right to take possession of and sell security to recover their losses.
2. Limited Flexibility
When an asset is used as security, the borrower might face restrictions on its use. For example, using a home as security will limit the borrower’s ability to sell or refinance the property until the loan is repaid. This reduced flexibility can be a drawback.
3. Longer Application Process
Obtaining a secured loan usually takes longer than an unsecured loan as a valuation needs to occur. ‘Desktop’ valuations, which is where online information will be reviewed to determine an assets value without a physical inspection, can be faster than in person valuations which can take a few days or more to be completed.
To Sum It Up
Before applying for a secured loan, it’s prudent to examine the different benefits and risks associated with them. While they provide access to lower interest rates, higher loan amounts, and longer repayment terms, they also carry the risk of security loss and may limit flexibility. Understanding the pros and cons is crucial so you can make informed decisions and mitigate risks.
Are Secured Loans the Right Choice For You?
We can help you determine if a secured loan fits your unique borrowing needs. Not only that, we’ll help direct you to the right lenders offering great terms that will help your business grow and succeed. Ready to learn more?
