Types of business finance

What is a secured business loan?

Businesses, both large and small, require financing from time to time to fund their growth or manage their working capital. This could be anything from the cost of inventory to payroll expenses. Business loans can provide the much-needed financial cushion businesses need to stay afloat and grow. Loans also give businesses the flexibility to spend money when they'd like to, rather than waiting until they have the cash on hand. Large and small businesses alike have several choices when it comes to business finance — so it's essential to understand the different options available.

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Small and medium enterprises (SMEs) are the backbone of the Australian economy. According to the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), small business accounts for around 98% of all businesses in the country. Data from ASBFEO shows that in 2018-19 small businesses contributed almost $418 billion to Australia’s GDP, equivalent to over 32% of the GDP for that year, and employed over 4.7 million people, making SMEs the country’s biggest employer. When it comes to financing, most SMEs in Australia rely on loans, which can be broadly broken down into two types — secured and unsecured loans.

What is a secured business loan?

A secured business loan is a type of finance that is backed by collateral. Collateral is an asset that serves as security for the loan and can be used to repay the amount if the borrower defaults. The most common type of collateral for a secured business loan is real estate property, but it can also include equipment, inventory, invoices (accounts receivable), or other business assets.

How do secured business loans work?

If you’re a business owner in Australia, you may be able to get a secured business loan from a traditional lender such as a bank or an alternative or online lender. To get a secured business loan, you’ll need to offer a security asset, which can be in the form of property (commercial and residential property can be considered), equipment, inventory, or other asset. The lender will then use this collateral to secure the loan, meaning they can take legal ownership of it if you fail to make repayments and default on the loan.

A secured business loan might be the right option if you want to pay a lower interest rate on your loan (compared to unsecured lending), take a loan for a longer duration, or need a large amount of money. Borrowers or businesses with bad credit who can’t access other types of financing may be considered for a secured business loan. This will depend on the lender and other factors, such as their ability to repay the finance. It’s important to remember that you could lose your asset if you can’t repay the loan — so it's not a good idea to take on a secured loan if you're unsure of your ability to keep up with the repayment schedule.

Difference between a secured and unsecured business loan

Secured Loans

With a secured loan, the borrower offers a form of collateral — such as equipment, a vehicle, or real estate property — as security for the loan. In the event that the borrower defaults on the loan, the lender can seize the collateral and sell it to recoup their losses.

Because they are backed by collateral, secured loans tend to be less risky for lenders, and as a result, they usually offer lower interest rates than unsecured loans. They also tend to be more flexible in terms of repayment schedules and the loan amount.

Unsecured Loans

An unsecured loan, on the other hand, is not backed by any collateral. This means that the lender is taking on greater risk, as they have no security to fall back on if the borrower defaults on the loan.

As a result of this increased risk, unsecured loans usually have higher interest rates than secured loans. They may also have stricter eligibility requirements, as lenders will want to be sure that the borrower has the ability to repay the loan.

How long can a secured business loan be?

Depending on your finance needs, a secured business loan term can range from one year all the way up to 30 years.

How to compare secured business loans

When comparing secured loans, it's important to look at the comparison rates, and not just the interest rates. The comparison rate takes into account the interest rate as well as any additional fees attached to the loan. Just because a loan has the lowest interest rate, doesn't mean it's going to be the most cost-effective option.

For example, consider Loan A: a 10 year loan of $100,000 and an interest rate of 5%. Now compare this to Loan B: the same loan amount and term with an interest rate of 5.3%. On the surface, you may think Loan A is the cheapest option. However, if Loan A includes an upfront fee of $700 and a monthly fee of $35, the comparison rate would be 5.86%. If Loan B has zero monthly fees or establishment fees, its comparison rate is 5%.

  • Loan A: 5% interest rate and 5.86% comparison rate.
  • Loan B: 5% interest rate and 5% comparison rate (the cheapest option)

It's also a good idea to think about the different types of features you may need in a loan. If you're looking for a redraw facility (where you can redraw amounts you've paid off of the loan), it may be worth paying higher fees for this feature.

Which loan should you go for?

Among secured and unsecured business loans, which type of loan is right for your business will depend on a number of factors, such as the amount of money you need to borrow, the interest rate, and your credit history. If you have good credit, you may be able to qualify for a lower interest rate on an unsecured loan. However, if you have bad credit, you may need to put up collateral to get a secured loan, and could end up with higher interest rates.

Pros and cons of secured business loans

Table Example
Pros Cons
Secured business loans can provide businesses with the capital they need to grow and expand their operations. If a business is unable to repay a secured business loan in Australia, it may lose the collateral used to secure the loan, which could impact its ability to continue operating.
The interest rates on secured business loans are typically lower than those of unsecured loans, making them more affordable for businesses. Secured business loans may require businesses to provide personal guarantees, which could put personal assets at risk if the business is unable to repay the loan.
The terms of secured business loans are often more flexible than those of unsecured loans, giving businesses more control over their repayment schedules. When applying for a secured business loan, the process may be complex and time-consuming, which may not be suitable for businesses that need access to capital quickly.
n Australia, a business owner can use a secured business loan for various purposes, including investment in new equipment, property expansion, working capital and managing business cash flow. The collateral required for secured business loans may be difficult to obtain, which could limit the borrowing options for some businesses.
In some cases, the collateral required for secured business loans can also be used as security for other loans, providing businesses with additional borrowing power.

Disclaimer: always refer to professional advice. The information presented here is purely indicative and not intended as advice. Always consult a legal or finance professional.

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