In contrast to unsecured borrowing, secured finance requires collateral and the application process is typically longer.
Because of this, secured business loans also come with lower interest rates and more borrowing power.
Collateral for secured business loans: how it works
You’ll put forward an asset (usually a property you own) to secure your loan. Banks prefer secured finance to unsecured, because having collateral on hand provides them with peace of mind.
In other words, if you were to default on your loan, they have a back-up plan to recoup losses. Lending to you without security, on the other hand, poses a higher risk.
Every business goes through ups and downs, but if you miss several repayments your lender might sell your asset (as a last resort) to retrieve the money lent to you.
Which assets are considered acceptable forms of collateral for secured business loans?
The most common form of collateral for a secured business loan is a property that you own, and it can be commercial, rural or residential.
Other options, though less common, include personal assets of high value, equipment, vehicles, trucks and even the equity within your business.
The type of asset you put forward as security and how much it’s worth can impact your loan term and the amount of cash you’re able to borrow.
For example, putting a property worth $500K down as opposed to a vehicle worth $50K will allow you to borrow more, at a lower interest rate.
Business loans secured by real estate
As mentioned, securing your loan against real estate is the most common form of collateral. Properties are easy to value and sell, making them a preferred option for most lenders.
Your lender will want to know how much equity you have in the property and what it’s worth, so having this noted down before you approach them can be helpful.
Our experts can lend a hand with this, help you get paperwork together and put forward an A+ application.
Business loans using equipment as collateral
High-value business equipment can be used as collateral in some cases. You’ll likely need to pay for your equipment to be independently valued, and your lender will want to see it has been taken care of and is in good condition.
Securing against equipment is known as a ‘sale and lease back’, and a bank will typically lend 80% of the asset’s market value.
Before approaching a lender, have maintenance records handy, and if you’re yet to pay for the machinery in full, note down how much of the equipment you’ve paid off and the amount owing.
How are assets assessed for suitability as collateral?
In most cases, assets are valued by your lender to determine their worth. This can take time, which is why unsecured finance applications are typically faster to process than secured applications.
Once your lender determines the value of your asset, they’ll use this information to figure out how much you can borrow and at what rate.
What if I decide I want to sell my asset?
You’ll need permission from your lender before selling an asset that is being used as collateral for a secured business loan. They might ask you to replace your security with a new asset before selling the existing one.
Does COVID-19 impact which assets are eligible for security?
Lenders have tightened their approval criteria since the outbreak of COVID-19 due to the uncertainty it brought about for businesses across the country.
Many lenders who previously accepted owned vehicles as security currently do not, but we’ve seen how quickly things can change over the past few months and lenders are starting to reopen their doors to more businesses.
We can help you understand your current options for collateral if you’re looking at taking out a secured loan.
I don’t have collateral for a secured business loan. What now?
Start-ups and businesses still in the process of growing don’t always have access to the assets they need for a secured loan.
Even those who do might not want to put their assets on the line upfront or go through the traditional application process. We understand this, and rest assured there are solutions for you if you’re in this boat.
We sometimes recommend unsecured finance to our clients in these positions, but note that unsecured finance comes with higher interest rates and shorter loan terms to make up for the additional risk.
If you’re looking at borrowing a large sum of cash without security, you might need to rethink this and accept a more realistic loan term. We recommend speaking to our lending experts to figure out the best plan of action for your situation.
We have access to a diverse pool of 80+ lenders and cutting-edge tools that allow us to find tailored solutions at competitive rates. So, if you’re struggling to get secured finance or have a unique scenario, we can often get your application over the line by leveraging our relationships with lenders that match your needs.
Best of all, it takes just two minutes for us to find your matches and we can usually get cash over to you in as little as 24 hours.
Nicki is our Senior Working Capital Manager. She works with a team of talented product specialists, leveraging 25 years combined experience to help Aussie businesses find tailored finance solutions.