To get you started, let’s explore two of the most common types of business finance—secured and unsecured loans. The difference between the two lies in whether you’re securing your loan with an asset, or leaving it unsecured at the cost of higher rates.
There are pros and cons to both types of finance, and the right one for you depends on the size of your business, how much you’re looking to borrow, whether you have access to collateral and how quickly you need cash.
The difference between secured and unsecured business loans
The main difference between secured and unsecured finance is the need for collateral. Secured loans require collateral to give lenders peace of mind that should you (touch wood) default on your loan, they’ll have a solution to recoup losses.
For example, let’s say a retail store applies for secured finance, offering their physical shop as collateral to secure the loan. If the store was to go bankrupt or be unable to repay their loan, the lender could sell the store (as a last resort) to make their money back and pay off the remaining loan balance.
Your interest rate, loan term and borrowing power will also differ depending on whether you choose a secured or unsecured loan.
If I choose secured finance, what can I use as collateral?
Both business and personal assets can be used as collateral. In some cases, businesses can secure their loan against the company itself, or other valuable assets, including equipment and real estate.
Usually, collateral takes the form of a property, whether that’s a home, investment or commercial space.
It’s also worth noting that you can ‘update’ your collateral as your business matures.
For example, a start-up might not have any business assets to work with, so they’ll secure their loan with a personal property. Once their business grows, they can refinance to release their personal property and replace it with a business asset.
Advantages of secured loans
Interest rates help lenders mitigate risk and it’s also how they make money. Therefore, if you offer collateral as security for your loan you’re seen as less of a risk and can likely score a lower interest rate.
This is provided your business is healthy and stable, proven through financials and your credit history.
With secured finance, you also have access to longer loan terms and larger amounts of money.
Disadvantages of secured loans
The application process for secured loans takes longer than unsecured applications. This is because your assets need to be valued for collateral, which can be a time-consuming process.
They’re also less accessible to smaller businesses who are still working hard to become established and might not have any assets to use as security. Even if you have assets available, you might not want to put them on the line.
Advantages of unsecured loans
Without the need for collateral, assets don’t need to be itemised or valued by your lender. This makes the application process for unsecured loans much faster, and many businesses (big and small) choose this route, even if they have access to secured options.
The fact that your assets are kept safe and sound can also be a huge relief. And it’s good to know that your loan term is based solely on the strength of your business, not the value of an asset.
Successfully paying off your unsecured loan can instil great trust in your business and improve your credit score, making it easier to obtain finance in the future.
Disadvantages of unsecured loans
Unsecured loans, while quick to settle, come with higher interest rates. There’s also less flexibility around how much you can borrow and the length of your loan term (i.e. the timeframe in which you repay funds).
Businesses who need large sums of money or longer terms might need to look into their secured financing options.
Which is best for me? Secured or unsecured finance?
The best type of business finance for you depends on what you’re looking to fund and how reputable and stable your business is.
Lenders will look at your financials and credit score—as well as the industry you’re in—when making a decision as to whether they’ll lend you money.
Smaller businesses who are just starting out might benefit from the more lenient approval criteria of unsecured finance, and in some cases, this might be the only realistic option available until the business grows.
Larger and more established businesses, on the other hand, will likely have assets suitable for collateral, making secured finance the more affordable and flexible option.
What can I use unsecured finance for?
Unsecured finance is a versatile product that can be used to fund a range of business initiatives, but it best suits shorter-term investments. This is because unsecured loans are riskier for lenders to offer, so they tend to come with shorter terms and higher rates.
You can still fund larger investments with unsecured finance provided your business can make large enough repayments within a shorter time frame.
Unsecured finance is ideal for quick cash flow boosts to kickstart growth or improve efficiency. Let’s say you see potential to grow your business by increasing your marketing spend, but don’t have the cash upfront. Unsecured finance could help you kickstart this growth.
Unsecured finance is also great for:
- Buying inventory
- Stabilising cash flow
- Increasing working capital
- Hiring new employees
- Paying suppliers and wages
- Daily operations
- Giving your business extra breathing room
- Purchasing equipment
What can I use secured finance for?
Secured finance can be used to fund anything and everything for your business, from properties to printers. With more flexible loan terms, secured finance can also fund longer-term initiatives and projects.
To summarise, choosing between secured and unsecured finance really depends on how quickly you want your funding settled, how much money you need and whether or not you can afford to put your assets on the line.
We’re seeing more businesses opt for unsecured funding to get cash quickly, but keep in mind this won’t land you the best interest rate.
Lending is complex. If you’re nxfot sure what you qualify for or have questions about your specific situation, get in touch with our lending experts on 1300 780 568 and they’ll point you in the right direction.
With 100+ years of experience combined in business finance, access to 80+ lenders and cutting-edge tech, they have the tools and knowledge to get you the most competitive rate and best suited product.
Glenn manages a team of working capital and asset finance product specialists here at Valiant, ensuring clients get the very best outcomes for their businesses.