Secured Versus Unsecured Business Loans: Everything You Need to Know

Entrepreneurs often rely on loans to grow and manage their ventures. Business loans infuse SMEs with funds, allowing them to undertake urgent expenses and critical investments. Your choice of a business loan can influence the long-term financial health of your organisation. That is why it is imperative to compare business loans and understand your options before finalising the agreement. Secured and unsecured business loans represent two broad categories of enterprise loans available in Australia. Let’s break down what they mean and how you can choose the most suitable funding solution to fit the needs of your firm!

Secured Business Loans: What Are They?

A secured business loan involves the submission of security or collateral. When you take this loan, you have to offer a valuable asset to cover the risks borne by your lender. You can use any asset for this: vehicle, real estate, equipment etc.

The loan agreement of a secured business loan states that the debtor will have to forfeit their asset if they fail to repay the loan. Adding collateral to the loan agreement reassures the lender about your commitment to repay. It gives them a safety net and minimises their risks. As a result, businesses can get favourable terms on these loans. A secured loan can provide the following advantages:

• Lenders are often willing to lend higher amounts when collateral is involved.
• The borrower can get lower interest rates on a secured business loan.
• A longer repayment period may be allowed when collateral is available.
• Businesses with bad credit history may also avail of loans with collateral. 

Unsecured Business Loans: What Are They?

Unsecured business loans do not require any collateral. Instead, the lenders assess the creditworthiness of the business and its owners to decide on loan approval. They also analyse the firm’s cash flow before finalising the loan. An unsecured business loan ensures the following benefits:

• Speedy approvals and minimal documentation as there is no need to verify assets.
• There is no risk of forfeiting valuable business assets.

However, unsecured business loans have higher interest rates than secured loan options. Lenders may also be unwilling to lend large amounts without security. The loan term in unsecured financing is usually under five years.

Choosing A Loan that Works for your Business: 3 Things To Consider

When you compare business loans, you need to consider the following aspects to choose between secured and unsecured options.

• Asset Availability: Medium to large ventures may find it easier to opt for a secured loan as they typically have accumulated valuable assets to offer as collateral. However, if your start-up business has a viable asset, you can take a secured loan to leverage the favourable loan terms. If you do not have adequate assets, an unsecured loan will be your best bet!
• Loan Purpose: The purpose of the loan often determines how much money you need. For example, businesses need not need substantial sums for plant and machinery finance as these can be financed up to 100% and the asset acts as an underlying security. While unsecured loans can also be available based on the business situation, a secured loan may be a better fit. The availability of collateral makes it easier to access higher sums to fund your purchases. On the other hand, unsecured credit may be more suitable for an urgent business loan to cover cash flow shortfall.
• Urgency: If you need money urgently, an unsecured loan is the best option. These low-doc loans are processed quickly, ensuring quick access to funds. However, if you have time, you can consider secured loans and compare their terms.

If you want more help choosing and comparing your options, reach out to the experts at Broc Finance today!