Knowing the structure and terms of your loan is critical for any business, big or small.
It’s not uncommon for business owners to wonder, “Is a small business loan secured or unsecured?” The bottom line is that the answer depends on your preferences.
Small businesses can take out either secured or unsecured loans based on their finances and what they’re trying to achieve.
Both have their benefits. However, secure loans are known to be more flexible since lenders view them as less risky. Business loan requirements differ for secured and unsecured loans, and typically include factors like business history, income, and assets.
But the story behind getting a small business loan, whether secured or unsecured, is more nuanced than that, as businesses often borrow money to support growth, manage cash flow, or invest in new opportunities.
The following sections explore both options to give you the upper hand in making a more informed choice.
Ultimately, the best loan option depends on individual circumstances, such as your business goals, financial situation, and repayment preferences.
Introduction to Business Finance
Business finance is at the heart of every successful company, guiding decisions about investments, funding, and managing risk. For many businesses, accessing additional capital through business loans is essential for growth, expansion, or simply maintaining smooth operations. There are several types of business loans available, with secured loans and unsecured loans being the most common options. Each loan type comes with its own set of requirements, benefits, and potential drawbacks. Understanding the differences between secured and unsecured loans—and how they fit into your overall financial situation—can help you make smarter choices for your business finance needs. By evaluating your business goals and financial health, you can determine which loan options best support your long-term success.
Secured Business Loans Explained
To get a secured business loan, you need to provide collateral to back it up, and a secured loan requires you to provide assets such as business assets, physical assets, or security assets. It can be any valuable asset such as equipment or real estate. Examples of collateral include business equipment, commercial property, residential property, accounts receivables, and other assets. The collateral gives the lender peace of mind that they can seize the asset and then sell it if you default on your loan.
But providing the right collateral isn’t as simple as it appears.
Lenders determine the loan-to-value ratio for the collateral you provide. And the ratio is usually based on the type of asset. The loan amount you can borrow is typically determined by the value of the security assets you provide.
For example, you could apply for a small business loan and offer real estate as collateral. Then, the lender appraises the real estate and may allow you to borrow 75% of the asset’s appraised value.
This situation is similar to other types of assets. Should you offer ready-to-go inventory as collateral, for example, the lenders will typically provide between 60%-80% of the appraised value. Lenders may also accept accounts receivables as security assets.
But keep in mind that lenders don’t have a fixed methodology to determine the loan-to-value ratio. Hence, it pays to ask around to find out how they set the value and which asset might work best as collateral for your business. Providing security is a key requirement for secured loans, and security options can vary depending on the lender.
More importantly, choosing to go with a secured business loan may mean that you’ll pay a lower interest rate. Secured loans generally offer lower interest rates because the secured loan requires collateral, reducing the lender’s risk. But again, this may vary from one lender to another, so you need to carefully weigh your options.
A chattel mortgage is another type of secured business finance, often used for purchasing business equipment or vehicles, where the business owns the asset from the start and repays over a fixed period.
Getting a Secured Loan
Unfortunately, the small business loan application, particularly for a secured loan, is more complicated than you think. The application process involves several steps, including submitting necessary documents and meeting specific eligibility criteria. However, following these steps to make getting a business loan simple can streamline the process for small business owners.
As mentioned, you’ll nominate an asset as your collateral once you’ve found a lender. After determining the loan-to-value ratio, the lender will approve borrowing a certain amount. The lender will also set an approved limit, which is the maximum amount you can borrow based on your collateral.
However, this could be a lengthy process.
Since the asset needs to be appraised, plus the lender needs to gauge the ratio, you could wait for quite some time before receiving approval.
During the life of the loan, you will need to make regular repayments, which are typically paid monthly, and you should be aware of any fees associated with the loan.
And even if you have significant collateral, you’re not automatically eligible for a secured loan. If you default, the lender may use the collateral to recover the outstanding balance, including any unpaid interest or fees.
To get approved, your business needs to have a good credit history. Also, you may need to prove to the lender that the company is making healthy profits. On top of that, you need a great business plan to show the lender that your business will be stable in the future.
To avoid going through the trouble and getting your asset locked into a lender’s contract, you may want to consider unsecured loans.
Unsecured Loans Explained
The main difference between unsecured and secured loans is that you don’t need collateral to get the unsecured option.
The lenders approve the loan based on the creditworthiness of your business.
Of course, you need to have a spotless credit history and excellent business model to get an unsecured loan. Plus, the lender may require you to provide additional documents to prove that. And you should keep in mind that unsecured loans are usually lower compared to secured loans.
Also, the lenders may ask you to provide a personal guarantee or a blanket lien.
So, what are these?
Simply put, guarantees and liens make an unsecured loan more secure. They are like a safety net that doesn’t involve collateral, but other legal vehicles lenders can use if you default.
For instance, the blanket lien allows a lender to claim any asset in your business to cover losses if you default.
Similarly, a personal guarantee gives a lender a chance to tap into your personal funds to finance the loan if you don’t repay it. But keep in mind that liability protection with LLC companies and corporations doesn’t apply here.
Getting an Unsecured Loan
The previous section may have you believe that unsecured loans are not the best option. But it’s not like that at all.
To start with, there’s little to worry about if you have a spotless credit history and a sound business plan. The lender might not ask you to provide a lien or guarantee. And you shouldn’t forget that banks aren’t the only lenders you can approach.
The great thing with unsecured loans is that they could be available to small businesses that aren’t eligible for secured loans.
Additionally, lenders such as banks have different options to offer as an unsecured loan. These are usually business credit lines or credit cards. And depending on where and how you want to use the loan, the given options might work great as an additional cash flow.
The bottom line is that getting unsecured loans is a good option for most small businesses. But you need to be careful in choosing the lender and preparing all the necessary documents.
It would be wrong to jump at the first opportunity that comes your way because you could pay high interest rates and potentially jeopardise your assets.
Security or No Security
Are small business loans secured or unsecured
As said, the answer depends on the business.
And yes, secured loans are good because your interest rate is lower, but the whole vetting process might take more time than you have to spend.
Therefore, you should consider unsecured loans as a better and faster way to get the necessary cash flow. But of course, the idea isn’t to put your business in trouble.
If you need any help getting an unsecured loan, Unsecured Finance Australia is here for you.
We specialise in unsecured business loans that small business owners can use however they see fit, including covering unexpected expenses or tax debt.
Apply online, and you can receive your approval within 24 hours.
Financial Statements and Loan Applications
When you apply for a business loan, lenders will almost always request a set of financial statements to evaluate your business’s financial health. These documents typically include the balance sheet, income statement, and cash flow statement. The balance sheet offers a snapshot of your business’s assets, liabilities, and equity at a specific point in time, giving lenders insight into your overall financial position. The income statement details your revenues and expenses over a set period, helping lenders assess your profitability. Perhaps most importantly, the cash flow statement shows how money moves in and out of your business, highlighting your ability to generate cash and meet ongoing financial obligations. By carefully reviewing these financial statements, lenders can determine whether your business is likely to repay the loan, making them a crucial part of any business loan application.
Cash Flow and Loan Repayment
Cash flow is one of the most important factors lenders consider when evaluating your ability to repay a loan. A business with strong, consistent cash flow is much more likely to meet its loan repayment obligations on time, reducing the risk for both the business and the lender. On the other hand, if your business struggles with cash flow, you may find it difficult to keep up with regular loan payments, which can lead to financial stress and impact your creditworthiness. Before you apply for a business loan, it’s essential to review your cash flow statement and ensure you have enough working capital to comfortably manage both your existing business expenses and any new loan repayments.
Fixed Interest Rate and Loan Terms
When considering business loans, it’s important to understand how the interest rate and loan terms will affect your repayments. A fixed interest rate means your loan repayments will remain the same throughout the loan term, making it easier to budget and plan for the future. This stability can be especially helpful for businesses that prefer predictable expenses and want to avoid surprises from fluctuating rates. In contrast, a variable interest rate can change over time, which might result in lower payments if rates drop, but could also increase your costs if rates rise. The loan term—the length of time you have to repay the loan—also plays a key role in determining your monthly payments and the total interest paid over the life of the loan. Carefully consider whether a fixed or variable interest rate, and a shorter or longer loan term, best suits your business’s financial situation and goals.
Managing Bad Credit
Having bad credit doesn’t necessarily mean you can’t access business loans, but it does make the process more challenging. Lenders may view businesses with poor credit as higher risk, which can result in higher interest rates, stricter loan terms, or the need for additional proof of financial stability. If your business has a less-than-perfect credit history, focus on improving your financial health by paying down existing debts, keeping up with current payments, and maintaining accurate financial statements. You might also consider seeking professional advice to explore alternative loan options or government-backed programs designed for businesses with bad credit. By taking proactive steps to strengthen your credit profile, you can improve your chances of securing the funding you need to achieve your business goals.
