Unsecured vs. secured business loans: Which one is best?

Nicki Ghazi

Tuesday, 18 February 2020

Taking out a business loan can help you grow your company the way you want. But the type of finance you choose could make or break your success, so it’s important to know and understand your options before signing those papers.

You’ve likely come across secured and unsecured loans in your search for a suitable finance solution. Both types of finance have key differences, benefits and drawbacks, and the right option for your business will largely depend on your goals, cash flow, urgency and whether or not you own assets that can be used as collateral.

Before diving into an application, you should have a clear idea of what you’re looking to achieve with extra funding and what your return on investment (ROI) looks like. If you need help determining your ROI, or finding out what you qualify for, chat to a Product Specialist at Valiant, free of charge.

Secured vs unsecured loans: What’s the difference?

The difference between secured loans and unsecured loans are that secured loans require collateral, whereas unsecured loans do not.

Collateral is simply an asset that you own, such as a vehicle, property or piece of equipment, used as a form of security in case you default on your loan. Having collateral gives your lender peace of mind that if you become unable to make repayments, they’ll be able to use your nominated asset to make up for any losses incurred.

Think of unsecured and secured finance as two different categories of loans—under each category, you can choose from term loans, equipment loans, lines of credit, merchant cash advances, overdrafts and more.

Whether your loan is secured or unsecured is simply a question of whether or not you’ll need collateral upfront, and that, in turn, dictates how much you’ll be able to borrow. This is because loan terms vary and unsecured loans tend not to exceed five years.

Which loan structure is best for my business?

There’s no one-size-fits-all answer to this, but the type of business you own and your objectives will guide your decision on whether to choose a secured or unsecured loan. Let’s explore both options.

Consider a secured business loan if…

Your company is large, with access to collateral and/or you’re looking to make a big investment.

Secured loans are generally best for larger or more established businesses. That’s because they require collateral, which is often more readily available in large organisations. If you have assets on hand to offer as collateral, such as a vehicle, property or large piece of equipment, secured loans are a good option because they come with lower interest rates in comparison to unsecured loans.

It’s important to note that the value of your collateral does not initially determine the amount you can borrow. For example, putting down a vehicle worth $80,000 as security does not mean you’ll be able to borrow $80,000. Your asset is simply a form of security, like a bond—a promise that you’re committed to paying back your loan.

With secured loans, you also have the ability to select longer terms (i.e. pay back your loan over a longer period of time) and borrow more money. Lenders can justify lending more to you (at a lower rate) because they have your assets to fall back on if things go wrong. This makes you less of a risk—your lender can rest assured that one way or another, they’ll get their money back. After factoring in affordability, a lender will determine the value of your security and lend a maximum percentage of its total value, but this amount is typically no more than 80% of the value.

One drawback of secured finance is that the application process can take much longer than an unsecured loan. That’s because assets need to be valued, and sometimes additional documents are requested by lenders to prove ownership of those assets.

If you need fast funding, an unsecured business loan may be a better option, however, as you’ll see below, they do come with limitations. If secured finance is best for you, a Valiant Product Specialist can help to speed up the process of your application by doing the heavy lifting on your behalf. That way, you can get back to running your business and snapping up sales.

Consider an unsecured business loan if…

Your business is on the smaller side, you don’t have assets readily available, or you need funds, fast!

Unsecured loans are best suited to small or medium-sized businesses for two reasons. Often, these businesses are still growing and developing, and therefore don’t always own assets that are large enough to use as collateral. Unsecured loans eliminate this issue as they do not require collateral upfront.

Instead, a lender will look at a small business’s cash flow, credit history, bank statements and financials, to decide whether they’ll approve an application.

Lenders will also be hesitant to offer larger loan amounts and longer terms to businesses without collateral, making unsecured loans best suited to smaller investments and quick cash injections.

More specifically, unsecured business loans are catered to shorter-term business needs like improving cash flow, paying back suppliers, purchasing small pieces of equipment or inventory, launching a new website, pushing marketing initiatives, or expanding a product range.

If you’re able to pay off your loan sooner, and don’t need a huge amount of money, an unsecured business loan could work in your favour. However, if you’re looking to make big investments (over 100-150k), unsecured finance may not satisfy your needs.

Unsecured business loans also come with higher interest rates to compensate for the added risk involved. On the flipside, unsecured finance applications are fast and hassle-free, as they eliminate the need to value assets for collateral.

This is just the tip of the iceberg—there are hundreds of secured and unsecured finance solutions out there, and what works for one business, won’t work for the next. That’s why speaking to a lending specialist is a wise move. You’re busy growing a company, which comes with a never-ending to-do list—researching hundreds of loan products is definitely not on there!

Our product specialists here at Valiant not only take your business goals into account to find you a great-value deal, they can also speed up the application process and get funds approved in as little as 24 hours. Leave the heavy lifting to the experts and compare business loans today, for free.

Nicki is our Senior Working Capital Manager. She works with a team of talented product specialists, leveraging 25 years combined experience to help Aussie businesses find tailored finance solutions.

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