It’s not uncommon for business owners to wonder, “Is a small business loan secured or unsecured?” The bottom line is that the answer depends on your preferences.
Small businesses can take out either secured or unsecured loans based on their finances and what they’re trying to achieve.
Both have their benefits. However, secure loans are known to be more flexible since lenders view them as less risky.
But the story behind getting a small business loan, whether secured or unsecured, is more nuanced than that.
The following sections explore both options to give you the upper hand in making a more informed choice.
To get a secured business loan, you need to provide collateral to back it up. It can be any valuable asset such as equipment or real estate. The collateral gives the lender peace of mind that they can seize the asset and then sell it if you default on your loan.
But providing the right collateral isn’t as simple as it appears.
Lenders determine the loan-to-value ratio for the collateral you provide. And the ratio is usually based on the type of asset.
For example, you could apply for a small business loan and offer real estate as collateral. Then, the lender appraises the real estate and may allow you to borrow 75% of the asset’s appraised value.
This situation is similar to other types of assets. Should you offer ready-to-go inventory as collateral, for example, the lenders will typically provide between 60%-80% of the appraised value.
But keep in mind that lenders don’t have a fixed methodology to determine the loan-to-value ratio. Hence, it pays to ask around to find out how they set the value and which asset might work best as collateral for your business.
More importantly, choosing to go with a secured business loan may mean that you’ll pay a lower interest rate. But again, this may vary from one lender to another, so you need to carefully weigh your options.
Unfortunately, the small business loan application, particularly for a secured loan, is more complicated than you think.
As mentioned, you’ll nominate an asset as your collateral once you’ve found a lender. After determining the loan-to-value ratio, the lender will approve borrowing a certain amount.
However, this could be a lengthy process.
Since the asset needs to be appraised, plus the lender needs to gauge the ratio, you could wait for quite some time before receiving approval.
And even if you have significant collateral, you’re not automatically eligible for a secured loan.
To get approved, your business needs to have a good credit history. Also, you may need to prove to the lender that the company is making healthy profits. On top of that, you need a great business plan to show the lender that your business will be stable in the future.
To avoid going through the trouble and getting your asset locked into a lender’s contract, you may want to consider unsecured loans.
The main difference between unsecured and secured loans is that you don’t need collateral to get the unsecured option.
The lenders approve the loan based on the creditworthiness of your business.
Of course, you need to have a spotless credit history and excellent business model to get an unsecured loan. Plus, the lender may require you to provide additional documents to prove that. And you should keep in mind that unsecured loans are usually lower compared to secured loans.
Also, the lenders may ask you to provide a personal guarantee or a blanket lien.
So, what are these?
Simply put, guarantees and liens make an unsecured loan more secure. They are like a safety net that doesn’t involve collateral, but other legal vehicles lenders can use if you default.
For instance, the blanket lien allows a lender to claim any asset in your business to cover losses if you default.
Similarly, a personal guarantee gives a lender a chance to tap into your personal funds to finance the loan if you don’t repay it. But keep in mind that liability protection with LLC companies and corporations doesn’t apply here.
The previous section may have you believe that unsecured loans are not the best option. But it’s not like that at all.
To start with, there’s little to worry about if you have a spotless credit history and a sound business plan. The lender might not ask you to provide a lien or guarantee. And you shouldn’t forget that banks aren’t the only lenders you can approach.
The great thing with unsecured loans is that they could be available to small businesses that aren’t eligible for secured loans.
Additionally, lenders such as banks have different options to offer as an unsecured loan. These are usually business credit lines or credit cards. And depending on where and how you want to use the loan, the given options might work great as an additional cash flow.
The bottom line is that getting unsecured loans is a good option for most small businesses. But you need to be careful in choosing the lender and preparing all the necessary documents.
It would be wrong to jump at the first opportunity that comes your way because you could pay high interest rates and potentially jeopardise your assets.
Are small business loans secured or unsecured?
As said, the answer depends on the business.
And yes, secured loans are good because your interest rate is lower, but the whole vetting process might take more time than you have to spend.
Therefore, you should consider unsecured loans as a better and faster way to get the necessary cash flow. But of course, the idea isn’t to put your business in trouble.
If you need any help getting an unsecured loan, Unsecured Finance Australia is here for you.
We specialise in unsecured business loans that small business owners can use however they see fit, including covering unexpected expenses or tax debt.
Apply online, and you can receive your approval within 24 hours.
Find out more by taking a look at our unsecured business loans.