Secured vs. Unsecured Business Loans

Choosing the right loan for your business can be daunting. Making the wrong choice could lead to financial repercussions, which is why it is essential to consider your options. Many businesses in Australia will weigh up secured vs unsecured loans. Before you choose it is essential to understand what they will offer.

The Difference Between Secured and Unsecured Loans

Both offer your business cash flow, but there’s a key contrast to consider. Here are the core differences:

• Secured lending: Put the risk burden on the borrower as the lending requires collateral. This is so the non-bank lender can acquire assets if the borrower’s loan defaults. Collateral can include a car, home, or any asset with value. 

• Unsecured lending: The risk burden is higher for the non-bank lender as the borrower does not require any collateral. However, they need the borrower to have sufficient credit for the lender to accept their loan application.

The one you choose depends on your specific circumstances. Below, we will explain the financial solutions in further detail. But remember, you can contact us for independent advice if you have any immediate questions.

What is Secured Finance?

It uses the borrower’s collateral as security for the non-bank lender. This is called asset security. You may sometimes hear this loan called asset-backed lending. For the borrower, secured business loans offer a certain amount of money. But the borrower must provide an asset in return for the lending. The collateral could be:

• Real estate such as a commercial or residential property.

• Vehicles such as trucks, vans, or specialised agricultural machinery.

• Equipment such as computers or office furniture.

• Business assets such as patents, trademarks, and copyrights.

• Financial instruments such as savings accounts or term deposits.

Non-bank lenders will expect the value of your assets to cover between 80%-100% of a loan. That is in the event you struggle with repayments and your loan defaults (which means a breach of your financial agreement). The application process is simple and even if a business has a poor credit rating it is possible to receive quick approvals. This is because effective collateral offers a lower risk proposition to non-bank lenders.

The Pros and Cons of Secured Business Loans

They are an easier way to access a cash lump sum. That’s the core benefit, but other advantages include:

• Lower interest rates as the lending offers less risk to non-bank lenders.

• Applications are often unaffected by poor credit history.

• Excellent options for new businesses needing a cash lump sum.

• Fast application process with quick approvals.

There are a few downsides to consider. For example, the assets on offer must cover 80%- 100% of the loan total. Otherwise, the loan will not be approved. Additionally, failure to meet repayments will result in the loss of important assets. As such, it is important to ensure repayments are possible before applying.

What is Unsecured Finance?

It offers significant flexibility. You do not need assets to gain approval, but you will need a good credit rating. It is wise to check the APR (annual percentage rate) of this loan type. That will help you understand the interest rate ahead. Ultimately, if you do not have assets to gain a secure loan then this is a strong alternative. The same goes if you are not willing to lose assets in the event of a default. And if you need quick access to a cash lump sum, it can be an excellent option.

The Pros and Cons of Unsecured Loans

This type of loan may benefit some businesses, such as ones looking for a small amount without the risk of losing any of your important assets. The main benefits to expect are:

• No reliance on collateral to gain approval for the loan.

• Quick and easy process for access to a cash lump sum.

• Flexible repayments and interest rates.

• Good credit history will streamline an application.

The downsides include a poor credit rating stopping access to this loan type, less money than a secured loan, and higher interest rates. However, if you lack assets but have an excellent credit rating, this type of lending may be ideal.

The Types of Secured and Unsecured Loans

What are the types of secured vs unsecured finance? Breaking this down, let us start with secured loans. Examples of this can include:

• Home equity

• Homeownership

• Mortgages

• Second mortgages

• Debt consolidation

• Life insurance

Types of unsecured loans include: 

• Personal

• Credit cards

• Student

• Line of credit

These are just a few examples as there is a wide range of different types available. 

Which is the Right Loan for Your Business?

When considering a secured loan vs unsecured loan, the most suitable financial solution depends on individual business circumstances. Keep in mind what you are looking for and weigh up your options.

• Secured loans: May be suitable for small businesses with assets and/or have a bad credit rating. It can provide a large cash lump sum with quick approvals. 

• Unsecured loans: May be suitable if lacking collateral or in need of a fast cash injection minus the need for asset appraisal. Credit history is not as important, but funds released are typically lower.

You should consider the benefits and potential risks when assessing your situation. If in doubt, speak to financial experts for independent guidance on an ideal solution.