One of the most common queries asked by small business owners looking to apply for a small business loan is: are all secured loans business loans on property? The short answer is no. You only sometimes need offer security to fund a business loan. Many financial institutions allow small businesses to borrow without collateral like real estate.
Secure vs. unsecured business loan
Before alternative lenders offered unsecured business loans, companies had to secure their loans with collateral, most often real estate. It is called a “secured loan.” However, with most banks imposing unattainable requirements for small businesses to qualify for secured loans, there is substantial demand for more flexible lending options for small businesses, for example, unsecured loans. This loan type does not require collateral like real estate and can be borrowed more flexibly. A company’s ability to obtain non-property-secured small business loans is highly dependent on a company’s circumstances, including factors such as loan amount, term, and industry. Looking into business turnover is also an essential part of the process of determining whether a business qualifies for an unsecured business loan.
Unsecured business loan
- Do not require security in the form of collateral such as property.
- Generally, you can borrow unsecured loans up to a certain amount, usually around $150,000.
- As a general rule, unsecured loans have shorter loan terms.
- They are often better suited to less established businesses that have not been in business for a long time and do not have the financial history of obtaining a secure business loan.
Examples of unsecured loans
- Credit cards are the best example of unsecured credit products. Every time you pay something with a credit card backed by a financial institution, it will give you an unsecured loan on the spot. They have previously determined your creditworthiness and provided a credit limit at the card approval time.
- If you have a strong relationship with your bank, you could qualify for an overdraft. It is an unsecured facility based on an honest assessment of the borrower’s character and past history with the bank.
Secured business loan
• Request collateral in the form of property.
• Secured loans are generally available for large loans over $150,000, however loan size can be as little as $20,000
• As a general rule, secured loans have longer terms up to 2 years.
• Often better suited to established businesses with long operating and credit histories to secure loans.
Examples of secured loans
- Business loans on a property can be used for any worthwhile business purpose such as cash flow or purchase of stock or equipment.
- Car finance can help purchase larger vehicles and are secured by the vehicle.
- Home equity line of credit is another type of loan that can be secured using a property.
Advantages of Mortgage-Backed Business Loans
Because loans are secured by real estate, interest rates are typically lower, reducing lender risk. You can usually have larger loan amount approved.
Benefits of unsecured business loans
- There is no need to offer security such as real estate.
- Easy application process.
- With minimal paperwork, you can often complete an unsecured business loan application online in minutes.
- Rapid access to funds. Once you submit your application, you will typically receive results within two business hours and receive your funds the same business day. Processing times may vary according to the lender.
- More flexible and credit terms. It also varies according to lender, but alternative lenders that offer unsecured business loans can usually offer flexible terms than traditional bank loans.
Secured and Unsecured Loans: Which one is the right business loan in Australia?
Which loan variety is suitable for you depends greatly on your business situation and goals. Note that secured loans are usually easier to obtain as they are a safer proposition for lenders. It is especially true if you have a bad or no credit history. In that case, lenders are right to seek some reassurance that they will have security should the loan not be repaid.
Secured loans tend to come with better terms, such as lower interest rates, higher credit limits, and, as mentioned, longer repayment terms. A secured loan is often the only alternative in some situations.
How do I get a secured loan or an unsecured loan?
Although the application process for secured and unsecured loans is similar, there are some essential differences. Banks or credit bureaus will check your creditworthiness whether you are looking for a secured or unsecured loan. When a lender turns down a small business loan application, in about half of the cases, the lender decides because of poor credit history. Secured loans with traditional banks may require a minimum credit score of 580, but higher scores are very beneficial.
Borrowers with lower credit ratings who manage to obtain loans may have higher than average interest rates and receive more stringent payment terms than borrowers with higher credit ratings.
Besides better terms, there is another reason to build a strong credit rating. It can offer you the luxury of choosing between secured and unsecured loans. Having good credit is always a good thing. If you are worried about offering your personal property as collateral, you will appreciate having that option. A strong credit rating allows you to sign unsecured loans on more attractive terms, thereby reducing your personal risk.
Private lenders are always a fuss free option when you are considering getting business loans on the property. By offering your property the funding is much easier than traditional banks and also with no need for financial information they are an easier option than unsecured. Never discount using a property as security when looking for business loan funding.