SECURED BUSINESS LOANS
Great numbers of small and medium-sized businesses in Australia obtain finance through secured business loans. Getting the right loan can help your business grow, capitalize on an opportunity, or manage your cash flow better. Borrowing money is expected in business, and secured loans are a fantastic finance option.
Things to consider:
What is a secured business loan?
You are required to post assets you own as collateral for a secured business loan, which is short-to-medium term finance. In most cases, secured business finance terms last several months to several years. Security assets are described as security in financial jargon.
With a secured business loan, you can have access to money by assuring an asset as a security. Obtaining a business loan against one or more of your assets could be ideal for raising the funding you need if you own a business with assets. Security means the lender is less likely to lose money if you fail to make repayments. In addition, you will be offered lower interest rates, longer terms, and more significant business loans if you have a secured loan. In Australia, there are a variety of lenders, from banks to alternative lenders.
Secured Business Loans in Australia: Learn How these loans work, the pros and cons, and how to secure funding fast?
Are business loans secured or unsecured?
There are two types of business finance: secured and unsecured. Secured business loans are the opposite of unsecured loans. The lender does not require you to put up any assets as security for unsecured financing.
How do secured business loans work?
As with any contractual financing or credit arrangement, a secured business loan works in the same way. The funds you need are borrowed over a set period, and you have to repay the principal (called the ‘principal’ in financial jargon), plus interest and any associated fees.
As part of your loan contract, you arrange regular repayments. Should you fail to make your contracted repayments, the lender can repossess and sell the asset you have provided as security to recover the debt.
In contrast, if you make all your repayments, the lender will not be able to seize your loan security. As insurance, it lowers the lender’s risk of you not repaying the loan. After you have fully repaid your loan, the lender will also not seize your asset in the future. Your business can eventually receive the title, or you can use the asset as collateral to obtain a second loan.
Are you securing a commercial loan?
An asset – or a combination of assets – can be used as security for a company loan. The lender can offer better repayment terms than an unsecured loan by using your assets as a guarantee.
Typically loans are guaranteed by property, equipment, machinery or land – but lenders may utilize any high-value assets you or your business own. There are other types of also different types of fixed lending. For example, invoice finance allows you to use your invoices and accounts receivables (money owed to your business) as collateral.
You can have access to more money for a longer-term with a secured loan, and you’ll be offered better interest rates than you would with an unsecured loan because the security reduces the risks for lenders.
Many banks and non-traditional (alternative finance) lenders can help you whether you want to invest in new equipment or add employees. If you prefer fixed, monthly repayments, you may be best served by a business loan (secured or unsecured).
Secured lending is also known as asset-funded lending.
What is collateral for a business loan?
In addition to commercial and residential property, business vehicles and equipment provide collateral for business loans. A debtor’s/account receivable’s value can also potentially be used as collateral.
How secured business loans in Australia work?
Lenders register their financial interest in the asset. This can be done by registering a first or second mortgage with the relevant government land title office in the state or territory in the case of property. You can also do this by registering a caveat over the property with the relevant titles office. When a caveat loan is in place, you cannot sell the property.
Secured business loans operate very similarly to most other types of business loans. A lender will agree to lend your business a certain amount, based on your needs and how much security you can provide.
The process is like applying for a mortgage, and it may take several weeks – the lender will need to value any assets you have placed up as security. In addition, if you’re using the estate as collateral, the lender is expected to place a legal charge on the estate.
You receive your cash and repay your loan in fixed monthly installments. Depending on your business needs, you can take out short term business loans or medium/long-term loans.
If you fail to repay your loan, the lender may claim ownership of the assets you put up as security.
Secured business loan example
Here’s a simple example of a secured loan:
- You apply for a loan of $200,000 and offer the lender your commercial property as security.
- If an independent valuation confirms the property’s value and suitability as security, the lender gives a conditional offer
- You pay an upfront fee for the lender to value your asset (the property) and any legal fees should the lender want to place a charge on the property.
- The lender values your asset higher than the loan.
- You agree to repay a fixed interest rate of 5% and $3,774.25 in monthly instalments for 60 months.
- You will pay $26,454.76 in total interest.
Legal charge vs. equitable charge
In the case of commercial property (or land) with an existing mortgage, the lender may register a legal or equitable charge.
Charges are actual legal interests in property (or land). Your lender has the right to sell if you don’t pay your loan. The lender will need the consent of your existing lender (for example, your mortgage provider), but this consent may not come. Registration of a legal charge will take several weeks.
You’ll get funds much faster (within hours once approved) if the lender registers an equitable charge over your property without the consent of your mortgage provider. Although the lender does not gain the power of sale over the property (though they could go to the law court and obtain an order for purchase based on their equitable charge), they gain enough security to approve your loan.
How Can You Get a Secured Business Loan?
As long as it has value, almost anything can be used as security for a business loan in Australia. Lenders prefer resaleable assets, hold their value well, are essential to your business, and are worth more than the amount you want to borrow. The point of a guaranteed loan is that the lender can recover damages if you fail to pay on credit.
When lenders value a company’s security for a secured loan, they see exactly how ‘encumbered’ the security is.
In practice, you can use any valuable asset as security for a business loan, for example:
- Offices, warehouses, shops, etc.
- Vehicles (such as trucks, vans, cars)
- Heavy machinery (such as printing presses).
Hard assets are these. Some lenders might also accept unsold stock in your warehouse. Some lenders will consider the net value of multiple assets, such as your residential property, car or shares. Cash can be used as security by some lenders. However, cash-secured business loans usually have different terms compared with property-secured loans.
Lenders might also require a personal guarantee as an additional form of security. You might also consider invoice finance (borrowing using unpaid invoices as security) or asset finance as another opportunity.
Secured loans: Pros and Cons?
The main benefit of a secured business loan is that they have lower interest rates than unsecured loans. This is because they provide the lender with more security. Unsecured finance has higher interest rates to compensate the lender for the higher risk. You can borrow more than you can with unsecured loans. Therefore, they increase your borrowing power since they are less risky for lenders. You can borrow for longer terms than you can with unsecured loans.
They get approved faster (primarily if you use a private lender). Because they are less risky, secured loans are usually approved faster than unsecured loans. They may not require credit checks (primarily if you use a private lender). The reason is that lenders are less likely to take a risk on them.
By offering assets as collateral, lenders take on less risk than they would with an unsecured loan, increasing your chances of approval if you’ve been declined for an unsecured loan. With security, lenders are more likely to lend more significant amounts over extended periods and lower interest rates.
Here’s more detail:
- Secured business loans in Australia are cheaper than unsecured loans and many other types of business borrowing because assets are used as security. Lenders have a solid secondary source of repayment, so the risk of losing money is reduced
- You can usually borrow more – the amount you can borrow depends on the assets you put up as security. You may even be able to obtain100% of the net value of these assets.
- Loan repayment terms are longer – if you can repay your loan over a lengthier period, your regular costs will be lower. So you can drive your business further. You are expanding your company instead of worrying about your cash flow.
- You don’t need a solid trading history or a good credit history – there’s less need for you to have a good trading history or a good credit history (credit file or report – they both mean the same thing) since any assets you use are a form of guarantee. Secured loans are suitable for a business with a less-than-perfect credit history or a startup without annual accounts or trading history. Lenders will consider any previous problems, but they may require a director’s guarantee.
Here are some things to be concerned about before you take out an unsecured business loan:
- You’ll need assets in your business that you’re willing to put up as security – this won’t suit all businesses.
- When you can’t repay your secured loan, the lender can sell the asset(s) to recoup the loan.
- There will probably be upfront valuation fees and legal fees if the lender places a legal charge on your property. You’ll still have paid the valuation fee if your loan is declined or smaller than you need.
- As opposed to other types of financing, you’ll need to wait for the lender to complete due diligence before you can access funds.
- You should consider the total cost of the loan if you borrow over a longer-term. Borrowing costs can mount up even if the interest rate is low.
What can you use a secured business loan for?
You can use secured business finance for a wide range of purposes, including:
- Buying equipment and machinery to grow your business.
- Buying more stock to increase your sales and profits
- Working capital to help your business operate day-to-day.
- Refinancing multiple debts to make your repayments easier to manage.
- Buying or renovating new business premises.
- Helping with any short term business loans cash flow issues.
So the main difference between a legal charge and an equitable charge is the power of sale.
Can I get a secured business loan if I have bad credit?
The answer is yes if you work with a private lender. ZF specializes in private lending. In most cases, we don’t even check the credit of clients seeking secured loans. Assets our clients provide as collateral for secured finance give our lenders all the security they need.
Through credit reporting agencies like Equifax, they check credit scores with any loan application. Further, if they reject your application, your credit score will plummet.
What if I don’t fully own the property that you want to put up as security?
You can usually use the equity (ownership) you have in the property you want to use as security for additional financing if you are still paying off the property. If your property is worth $800,000 and you owe $300,000 on it, you have $500,000 of equity that you may use as collateral for a secured loan.
What are secured business loan interest rates?
Rates are determined by the type of security you can provide. Most lenders prefer to use residential or commercial property as security since it tends to increase in value over time (unlike equipment or vehicles). Finance involves the single most significant cost, interest. Australian interest rates are at record lows, so now is an excellent time to borrow. The Reserve Bank governor says low-interest rates in Australia will remain for the next few years while the economy recovers.
Why it is so difficult to get a secured loan with a bank?
Banks prioritize their shareholders, not small-to-medium business loan customers. Secured finance with a bank in Australia is more complicated and time-consuming than a private lender. The government incentives designed to encourage lending after COVID-19 are not working to enable them to approve loans.
The application and approval process is also time-consuming. Paperwork is their favourite thing! A secured loan is a low risk for lenders, so there should be no delay in processing your application. Banks often take days or weeks to approve a secured loan.
How to get a secured business loan fast?
Getting approved by private lenders is more accessible, and the process is faster. A good opportunity doesn’t wait for approvals from finance authorities in the business, and time is money.
- We can access basic information online using simple online applications.
- More than 300 lenders are part of the network. We will match you with a lender that best suits your needs.
- Settlements and approvals are fast.
- A highly personalized service.
Small-to-medium businesses and sole traders can obtain secured financing through us. These loans are legal contracts between our clients and our private lenders. No surprises with our finance documentation since we provide it all upfront. Transparency is our top priority.
What amount can I borrow for a secured business loan?
You can borrow up to 80% LVR of the offered security. We can arrange a valuation so you can know your borrowing power and repayments. The more security you can provide, the more you can borrow (and vice versa). Similarly, the more you can repay, the more you can borrow (and vice versa). We can assist you if you provide us with your business financials. Also, we can set up flexible repayment terms based on the cash flow of your business
We understand what it’s like to run a business, and we want you to succeed. Likewise, our private lenders will do the same.
Can I guarantee a commercial loan against the estate?
As long as it has value, almost anything can be used as security. Some lenders will accept residential property (or other personal assets) as collateral. In evaluating a business’s security, lenders look at how ‘encumbered’ it is (i.e. do you own it 100% or does it have other parties involved?). Also, lenders might ask for a personal guarantee.
Can you pay off a secured loan early?
Depending on the repayment arrangement, you negotiate with your lender. The terms and conditions will include it.