Secured vs Unsecured Business Loan: Which One is Right for You?

By: Aaron Robbins

When it comes to financing your business, one of the decisions you’ll inevitably face is choosing between a secured and an unsecured business loan. Each option has its pros and cons, and understanding the differences between the two can help you make an informed decision that aligns with your company’s needs and goals. In Australia, where the business landscape is vibrant and diverse, it’s essential to explore your loan options thoroughly.

Let’s delve into the key features, benefits, and considerations of secured and unsecured business loans to help you determine which one is right for your business.

Secured business loans

Secured business loans are business loans that use collateral such as real estate, equipment, or inventory, as security for the loan. These loans are considered less risky for lenders and often come with lower interest rates and higher borrowing limits than unsecured finance.

The potential benefits of secured loans for business

  1. Lower interest rates: With collateral to secure the loan, lenders are more likely to offer lower interest rates than other forms of unsecured business finance, which could make secured business loans a more cost effective lending option than an unsecured loan.
  2. Higher borrowing limits: By securing the loan with an asset, you may be able to access larger loan amounts than if you were to apply for unsecured finance. This could provide you the financial flexibility to fund substantial business ventures.

Considerations when applying for a secured business loan

  1. Asset risk: Putting up collateral means you risk losing the asset if you default on the loan. Ensuring that you have a solid repayment plan and are confident in your ability to meet the financial obligations are important factors that may help reduce this risk.
  2. Valuation and appraisal costs: You may need to pay for professional assessments of your assets to determine their value, adding to the overall cost of the loan.

Unsecured business loans

Unlike secured loans, unsecured business loans do not require collateral, making them a potentially viable option for businesses that lack substantial assets or are the start up business phase and are yet to acquire business assets.

Unsecured loans may provide these potential benefits:

  1. No collateral required: You may be able to access funds without risking valuable assets, which is particularly advantageous for startups or businesses without significant physical assets
  2. Flexibility: Unsecured loans may provide more flexibility in how you use the funds, whether it’s for working capital, equipment purchases, or marketing campaigns.

Keep in mind: Caveat lending and home equity loans are both types of secured finance however, provide flexibility in how you use the funds!

What to consider before taking out an unsecured loan

  1. Higher interest rates: Lenders compensate for the increased risk by charging higher interest rates, potentially making the loan more expensive in the long run.
  2. Stricter eligibility criteria: Without collateral, lenders focus more on creditworthiness, financial stability, and business performance, making it potentially more challenging to qualify for an unsecured loan.
  3. Lower borrowing limits: Unsecured loans typically have lower borrowing limits compared to secured loans, which could limit the amount you can access for significant investments.

Do private lenders offer both secured loans and unsecured business loans?

Private lenders will generally offer unsecured loans as well as secured loans! Many Australian business owners utilise private lenders when seeking business finance, due to the flexibility and fast funding that private lending offers. In addition, private lenders aren’t bound by the same rigidity of traditional lending criteria, making them a potentially better match for Australian businesses.

More to know on accessing business loans

Generally speaking, when accessing either secured or unsecured finance, the lender will want to determine your ability to repay the loan, typically through your business financials including your cash flow. For small business loans or for businesses who may not have held a credit product before, lenders may request business financial statements, history of the business bank account or business plans to help determine the business health to be able to loan funds.

Does my business need a good credit score to be able to access a small business loan?

While creditworthiness via a credit check is typically part of the application process for all lending, private lenders and alternative financiers may not need to rely on your credit history to approve the loan. Small business owners typically invest their blood, sweat, tears, as well as their own personal finances to help realise their business venture — which often leaves a market on their credit history!

If you have no business history, and want to avoid taking out personal loans to fund your business goals, consider speaking with specialists in private lending!
business owners need to choose between secured or unsecured loan

Deciding between secured and unsecured loans

When deciding between a secured and an unsecured business loan, consider your business’s specific needs and circumstances. Things to consider will be whether you have an asset to offer as security. This may include an investment property, family home or business equipment.

Secondly, your financing needs will guide your decision on which loan product (and which lender) is going to be best for you. Accessing lenders that specialise in business loans may be more beneficial than seeking out a generic lender, or one who isn’t familiar with assessing applications from business owners.

Both unsecured business loans and secured loans hold purpose in business financing. To help guide your decision, it is prudent to consult with a business financing professional, such as a financial adviser or accountant.

When deciding between product types and lenders, consider a business broker who can look at multiple lenders and determine which may be the best loan for you, based on your unique goals and financing needs. At DFS, we have access to over 200 of Australia’s top private lenders, which means that we are wel positioned to work with you to find the most suitable business loan for your needs; whether it be a secured loan or unsecured loan.

Reach out to the team to learn more!


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