Introduction: Unlocking Your Business’s Potential with Secured Loans
A secured business loan can be a powerful tool for businesses aiming to grow, invest in new equipment, or manage day-to-day operations. By providing assets as security, businesses can unlock access to higher loan amounts, lower interest rates, and more flexible repayment terms than many other financing options. Whether you’re looking to purchase new business equipment, expand your premises, or simply boost your working capital, secured business loans offer a way to leverage your existing assets to secure the funding you need. In this article, we’ll explore the benefits and risks of secured business loans, and look at the different types of assets you can use as collateral to help your business reach its full potential.
Types of Business Loans: Secured vs. Unsecured
When considering business loans, it’s important to understand the main difference between secured and unsecured loans. Secured loans require you to offer assets—such as commercial property, business equipment, or accounts receivable—as collateral. This security reduces the lender’s risk, often resulting in lower interest rates and more flexible lending criteria. On the other hand, unsecured loans do not require any collateral, but because the lender takes on more risk, these loans typically come with higher interest rates and stricter eligibility requirements. Knowing the key differences between secured and unsecured loans can help businesses choose the right financing solution for their needs, whether they want to leverage valuable assets or prefer a faster, collateral-free application process.
Secured small business loans can help you unlock your business’ full potential. Learn about how they work and if you should consider getting one.
If you own a small business, you might be struggling in an insanely competitive market. You need to go above and beyond to stand out and establish your position.
A small business loan is a type of lending product designed specifically for business purposes, such as expansion or working capital.
In many cases, small businesses can’t do this on their own. Due to limited resources, they may not be able to support business growth – at least not to the level they want – without external funding.
According to the Australian Banking Association, only 30% of small businesses are debt-free. The other 70% have received over a million small business loans combined.
Most small business owners first turn to banks for a small business loan secured by collateral before they explore other options. There are various lending products available for different business purposes. In this article, we’ll talk about the reasons why that might be a good idea.
The decision to choose a secured loan often depends on the individual circumstances of each business, such as their financial needs and goals.
But first, let’s answer one of the most common questions that borrowers have.
How Are Business Loans Secured?
Secured small business loans require you to provide assets, such as a valuable asset, as collateral. This is because lending to start-ups and small businesses is often very risky. As they usually don’t have a distinguished financial track record, the lender has to assume a higher risk. There’s the chance that they won’t be able to repay the loan. That’s why lenders ask for security.
So how are business loans secured, exactly?
You’ll have to put up an asset such as a business vehicle, machinery, commercial real estate, accounts receivables, or money owed (outstanding invoices) as collateral. The lender will then determine how much you can borrow based on the asset’s value.
For this purpose, they’ll use the loan-to-value (LTV) ratio. For instance, if a lender uses an LTV of 80% and assigns a value of $100,000 to your collateral asset, you’ll be able to borrow up to $80,000.
Of course, as long as you meet your loan terms and repayments, nothing will happen to your asset. In the event of any defaults on the loan, the lender has the right to take your asset and sell it to recoup the money. If the sale of your asset doesn’t cover the outstanding balance of the loan, you’ll still owe the difference.
Similarly, if your asset loses too much value over the term of the loan, the lender might ask you to pledge more assets to keep the loan. If the property you want to use as security is already mortgaged, you may need consent from the existing lender before proceeding.
Once the loan is fully paid, the security interest in the asset is released.
With all that, is it worth taking on this risk?
Property as Collateral: What Can You Use?
When applying for secured business loans, property is one of the most common forms of collateral. This can include commercial property like office buildings, warehouses, or retail spaces, as well as residential property such as homes or investment properties owned by the business or its directors. Beyond real estate, businesses can also use other assets—such as vehicles, business equipment, or even inventory—to secure a loan. The estimated value of the asset you offer will directly impact the loan amount you can access, as lenders typically require a professional valuation to determine how much they are willing to lend. By understanding what assets can be used as collateral, businesses can better prepare for the application process and maximize their borrowing potential.
Credit History and Secured Business Loans
Your business’s credit history plays a crucial role in securing a business loan, whether you’re applying for a secured or unsecured business loan. Lenders will review your credit history, financial statements, and overall financial health to assess your eligibility and determine the interest rates you’ll be offered. While secured business loans may be more accessible for businesses with a less-than-perfect credit history, a poor credit record can still result in higher interest rates or stricter lending criteria. Maintaining a strong credit history is essential for accessing the best financing options and ensuring your business can secure the funds it needs on favorable terms.
Applying for a Secured Loan: What to Expect
The application process for a secured business loan is typically more detailed than for unsecured lending. You’ll need to provide comprehensive business financials, including recent tax returns, cash flow statements, and a list of assets you intend to use as collateral. Lenders will also assess your credit history and may request additional documentation to verify your business’s financial position. The approval process can take several weeks, so it’s important to plan ahead and be prepared for any requests for further information. Seeking professional advice can help ensure your application is complete and that the loan structure aligns with your business goals, giving you the best chance of approval.
Secured Business Loans and Cash Flow
Secured business loans can be an effective way to manage your business’s cash flow, invest in growth opportunities, or cover unexpected expenses. By offering assets as collateral, businesses can benefit from lower interest rates and longer repayment periods, making it easier to manage monthly repayments and maintain healthy cash flow. However, it’s vital to ensure your business can comfortably repay the loan, as defaulting could result in the loss of your collateral asset. Before applying, carefully assess your cash flow and financing needs, and consider all available options to ensure a secured business loan is the right fit for your business’s financial situation, including understanding why business loans are important.
Benefits of Secured Small Business Loans
There are a few upsides to taking out a secured loan. The first is the ability to take out larger loan amounts compared to an unsecured loan. As you’re putting up security for the loan, the lender will be more open to giving you a higher amount.
You can use that cash injection to finance any aspect of your business. A great example is a company that had to restock its inventory:
After being in business for a while, a small retail business knows that its peak season is December and January. One year, sales were so good that the business sold out its entire inventory.
To ensure uninterrupted growth, they chose to take out a $30,000 loan to restock their inventory. This would allow them to continue to make money, perhaps with even better results in the year ahead.
True to form, the business used the loan to buy the necessary stock and sold it at a higher profit margin, partly to pay for the cost of the loan. They were able to repay the loan and boost their cash flow at the same time.
Aside from the higher loan amounts, you might also be able to negotiate a lower interest rate and fewer fees with a secured loan compared to unsecured options. This is because secured loans present less risk to the lender due to the collateral, which is why they can offer a lower interest rate and longer repayment periods.
Still, you must keep in mind that the interest rate will also depend on your credit history and financial standing. You need to pay attention to how to compare business loans and consider everything that determines whether you’re a reliable borrower. However, assuming all else is equal, a secured business loan should be cheaper than an unsecured one, as the total cost of the loan includes not just the interest rate but also any associated fees.
Lastly, you can expect the repayment terms to be rather long. In many cases, a secured loan can be structured as a term loan with a longer period for repayment, sometimes stretching out for as long as 30 years. This can allow you to repay the loan more comfortably without affecting your cash flow.
Drawbacks of Secured Loans
Just because secured business loans come with convenient benefits, doesn’t mean that they’re always a good idea. In fact, you should only take one out if you’re 100% sure you can repay the loan.
The main reason is pretty obvious. If you default for any reason, you risk losing your security asset. If you put up the building as collateral, you’d have to move your business location. You’d also lose all the equity you had built up in that asset.
Furthermore, a default will do severe damage to your credit score. This will make it harder to take out a loan in the future. While secured loans are generally easier to obtain for people with a bad credit history, you may face a higher interest rate as a result.
Some lenders might be willing to work something out if you run into problems paying off the loan. They may offer to restructure the loan to help you avoid defaulting. Still, you should carefully weigh the risk and reward before taking out a secured business loan.
If you do not want to risk your assets, unsecured business loans are an alternative. These loans do not require collateral, but they are typically available for smaller loan amounts and often come with a higher interest rate. Unsecured business loans may be more suitable for businesses that prefer faster approval and less paperwork, but you should consider the increased cost of borrowing.
Are Secured Loans for You?
As you can see, applying for a secured business loan can be an excellent way of funding the growth of your business. You can get the desired amount at terms and conditions you’re comfortable with.
But this also comes with associated risks.
An unsecured loan doesn’t require your business assets as security up front, and the application is usually much easier and quicker. However, if you do default on your loan, any assets you have may still be claimed by the lender.
However, should you find this option more appealing, Unsecured Finance Australia can help.
