How do business loans work?
When a business applies to a bank, lender or credit union for additional funds, it is applying for a business loan. These funds may finance various business-related activities, including purchasing new capital or machinery, increasing liquidity (cash in the bank), or securing further market opportunities.
What is a secured business loan?
So, what are secured loans? Well, business loans can be either secured or unsecured. To be ‘secured’, the borrower must provide one or more assets as a guarantee – known as ‘collateral’. Assets that apply include property, machinery or vehicles owned by the business, business capital, and other valued items. The purchased item from the loan can act as collateral in certain instances, such as buying a company car.
The collateral creates security for the lender in the event of non-payment, known as a ‘security interest’ on that asset. For example, if you default on the repayments for a company vehicle, the lender could decide to sell or seize the vehicle for compensation. The same could happen to real estate owned by your business if that guarantees the debt. Whatever is nominated as collateral is at risk if the business defaults for business loans secured against property.
To ensure recognition as a ‘secured creditor’ in the event of default, lenders should register security interests on the Personal Property Securities Register (PPSR). This official government noticeboard also allows creditors to check if other entities have already claimed a security interest in that asset. PPSRLogic, from CreditorWatch, allows a seamless process for registering and managing interests on the PPSR. With ApplyEasy integration, businesses can complete registration on one page with one click.
How do secured business loans Australia work?
In Australia, a business looking to take out a secured loan will typically offer up an asset as collateral. Depending on the assets owned by your business, as well as its revenue, current debts and cash holdings, it may meet the eligibility criteria for a secured cash loan.
Lenders will then apply their individual requirements to your application, so you must check the terms and conditions for each product. If the business meets the eligibility criteria, you can decide to proceed with the application.
Generally speaking, the value of the collateral offered must meet or exceed the value of the business loan secured. To acquire a higher debt, you must put forward more as security for a business loan. For real estate secured business loans, the property could be worth significantly more than the debt (especially in Melbourne or Sydney). If a default occurs and the property has to sell for creditor compensation, the business will recoup the sale revenue minus the remaining debt.
What is the difference between a secured and unsecured business loan?
Do business loans need to be secured? No, an unsecured business loan provides businesses access to debt if they don’t have (or don’t want to offer) the necessary assets for collateral. Because no security interest guarantees the loan, the lender takes on more risk with these products. As such, unsecured business loans typically have higher interest rates than comparable secured loans.
That isn’t to say that fast secured business loans are better – it depends on the individual circumstances of your enterprise. For startup companies: unsecured loans may provide access to otherwise unavailable cash. Many companies lack the asset holdings or yearly revenue to meet eligibility requirements for several secured loan products. Unsecured loan products have their place and can be a valuable debt tool for many entities.
Also, to be clear, if a business defaults on an unsecured loan and can’t see a pathway to repayment, it may eventually have to declare insolvency. At that point, an administrator may decide to sell off owned assets regardless to compensate creditors. So, a business’s assets aren’t protected from sale by an unsecured loan – they just don’t underpin it short term.
Why might you want a secured business loan?
Secured small business loans often have lower interest rates than unsecured loans for the same principal amount. As discussed above, because one or more nominated assets act as a guarantee – the lender assumes less risk. You might pursue a secured loan to take advantage of these savings. Remember that significant fees and interest rate costs may still apply, and use a loan calculator to determine costs before applying.
Secured finance can also be attractive to businesses with a lower (or no) credit score. Lenders may be willing to offer loans to such companies if they have the asset holdings to guarantee the debt. A business in this ‘secure business loan bad credit’ position might not meet eligibility requirements for unsecured loans, which typically place a higher premium on credit history and score.
What are the pros and cons of secured business loans?
- The interest rates for secured loan products are typically lower than for comparable unsecured loans.
- A business with a less favourable credit score may still be able to access debt through a secured loan if it has the assets to offer as collateral.
- Secured loans place one or more assets, sometimes the business owner’s personal property, in jeopardy of immediate seizure or sale in the event of default.
- Some businesses aren’t eligible for secured loan products due to a lack of asset holdings.
Who is eligible for secured business loans?
Different lenders will apply their specific eligibility requirements for secured loan products, which your business must ensure it meets. These may include a minimum annual revenue threshold, asset holding requirements, or liquidity criteria. Every business should read through the terms and conditions for each secured loan product to determine eligibility.
How do you apply for a secured business loan?
If you’re considering applying for a secured business loan, these are the steps you may take:
- Conduct thorough due diligence to identify and compare suitable loans to determine the best secured business loans for your business.
- Ensure the business meets all eligibility criteria.
- Collect any necessary documentation to support your application.
- Fill out and submit the application form, either online, over the phone or in-branch.
- Receive approval, and the funds should be deposited into your business account.
Register security interests and prioritise collections with CreditorWatch
If you are a creditor, you must correctly register security interests on the PPSR. Unfortunately, it can be a confusing and time-consuming exercise to go through. Thankfully, PPSRLogic from CreditorWatch has been purpose-built to mitigate these problems.
Registrations can be uploaded and managed from one hub with minimal fuss or effort. Integrate any new registrations into your customer onboarding form with the help of ApplyEasy. Don’t leave your creditor status to chance – secure your rights on the PPSR before it’s too late.
For borrowers, you may think that you have to sell off assets to cover repayments when, in actuality, the money you need is sitting in accounts receivable. Late-paying clients can place a large amount of stress on business owners, especially when they have their own repayments to meet. You must leverage the collections resources from CreditorWatch. We have letter templates for every eventuality – welcome notices, late payment notices, final reminders and more. Complete with your branding and our powerful third-party endorsement – you can reduce days-sales-outstanding by up to 53%.
It’s time to take charge, register security interests and protect your business from risky debtors. Speak to our expert team today.
Top secured business loans and lenders
There are a multitude of secured business loan options available in Australia that are designed to suit a range of business needs and goals. The best secured business loan for your company will depend on a range of factors, including:
- The interest rate. The most significant factor affecting the overall cost of the loan. The interest rate will be charged on top of your loan amount. Generally speaking, the higher the interest rate, the higher your loan repayments. However, secured business loans typically come with lower interest rates than unsecured business loans.
The fees. You may be charged a range of fees, which will also impact the overall cost of the secured business loan. These include application fees, mandate fees, service fees and more. Be sure to read the terms and conditions and product disclosure statement (PDS) of the loan product to be aware of all potential costs.
- The loan term. Short term business loans typically range for 1-3 years. Long term business loans can range up to 30 years. The best option for your business will depend on the amount you wish to borrow and your capacity to repay it over the loan term.
- The features offered. You may also want to compare loan features, such as the ability to make extra repayments without penalty. If paying off your business loan before the loan term is a priority for you, it may be worth prioritising business loans with this feature.
- The lender. Different banks and lenders may suit different businesses. For example, if you have a younger business with less than two years’ worth of financial statements, smaller, competitive lenders may be more likely to approve you for a loan. Comparatively, larger, more established companies may favour the big four banks (CommBank, Westpac, ANZ and NAB), for the sense of security these institutions offer.
The most important thing to do before you consider applying for a secured business loan is to compare the market carefully, using these loan factors as a guide to narrow down your options. Comparison tools, such as comparison tables provided by websites like Canstar or Finder, can come in handy here.
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