Updated on 6th November 2024

If you’re looking to raise capital to grow your business, secured business loans could be an affordable way to get the funding you need.

By using an asset as security, you can reduce the risk to the lender and receive more competitive pricing compared to unsecured business finance. But what is a secured loan exactly and how does it differ from unsecured finance facilities and other options?

In this guide, you’ll learn everything you need to know to determine if a secured loan is right for you.

What Are Secured Business Loans?

Secured business loans are a type of financing that uses an asset owned by you or your business, such as property, equipment, and accounts receivables, as collateral for the funding facility. The asset provides security, reducing the risk for the lender.

Generally, secured business loan financing offers lower interest rates due to the asset security. If you fail to make repayments, the lender can take ownership of the asset to recoup the cost of the financing.

Secured Business Loans vs Unsecured Business Loans

In contrast, an unsecured business loan is not protected by any collateral. If you are unable to repay the financing, the lender does not automatically take ownership of your personal or commercial asset. However, unsecured business finance is generally more expensive than secured business loans that require collateral.

How Do Secured Business Loans Work?

A secured business loan is a form of debt finance. Secured business loans work by having the finance provider agree to lend your business an amount of money based on the value of the asset used as collateral and your ability to make repayments.

The lender will conduct a valuation of the asset and will usually want to see your financial statements. The lender will place security over the asset before you receive funding as part of the settlement process.

What Can You Use as Collateral for a Secured Business Loan?

The assets you can use as collateral for business loans will depend on the type of secured lending.

You may be able to leverage assets that you are unaware could be used as collateral for funding. Your accounts receivables, inventory, raw materials, vehicles, and equipment could all be potential ways to release capital tied up in your business and secure funding without putting your home or another commercial property at risk.

Getting a secured business loan will usually involve residential or commercial property being used as security. Lenders often value commercial property highly due to its stability and potential for appreciation, which can significantly influence interest rates and loan amounts. You may not need to own the asset outright to use it as collateral for funding. For example, if you own a 60% share of your home, you may be able to use that equity as security for a business loan.

Read our guide, Exploring Your Hidden Assets, to see if your business has any hidden assets that you can use for a secured business loan.

What Are the Risks of a Secured Business Loan?

The most significant risk involved with secured business loans is that you could lose the asset if you are unable to make repayments. If you use a commercial asset, this could impact your ability to operate. If you use your residential property, this could mean that you lose your family home. Businesses with a poor credit history may still qualify for secured loans due to the reduced risk to lenders when assets are pledged as security.

You should only borrow what you can afford. Before you agree to any financing arrangement, it’s essential that you are aware of the cost of the monthly repayments, any fees, and the total amount you will repay.

Business Loan and Secured Loan Requirements

Secured loan requirements can vary from lender to lender. It is important that you consider the specific eligibility criteria for any business loan provider under consideration. You can read more about specific requirements for a business loan in our article: Requirements for a Business Loan: How are you assessed?

Banks and other traditional loan providers are subject to strict lending criteria while non-bank funding providers like ScotPac are more flexible.

In most cases, you will need to provide up-to-date financial statements to support your business loan application. Lenders will want to see proof of your turnover, profit and loss statements, and a cash flow forecast.

Read our guide to learn how to create a cash flow forecast for your business.

What To Look for in Secured Business Loans

Secured loans are usually associated with long-term financing arrangements, but there are short-term options, including Invoice Finance and working capital loans.

Whether you’re looking for long-term or short-term financing, you should consider the following features when comparing your options:

Interest Rates with Secured Loans

The higher the interest rate on business loans, the more you will pay for the financing. Interest rates can be fixed or variable and are calculated based on your creditworthiness, the value of the asset you use as collateral, and other factors like the type of financing.

Fees and Charges on a Secured Loan

Many funding providers charge an upfront fee and ongoing fees. You may also be charged additional fees if you miss a repayment. Make sure you understand all the fees involved before applying for funding.

Repayment Schedule for Secured Business Loans

The faster you can repay the funding from your business loan, the less it will cost you in interest fees. But some providers charge penalty fees for early payment.

Check the repayment schedule of your business loan and see if there is any flexibility so that repayments can be tailored to your cash flow needs.

Secured Lending for Businesses

There is a range of secured lending options available to businesses, and some are more difficult to access than others.

It can be challenging for SMEs to qualify for traditional financing like a property-secured business loan from a bank. Nevertheless, loans to SMEs predominantly require collateralisation, and almost half of all business loans in Australia are secured by residential property.

The problem for many business owners is that they do not have enough real estate equity to qualify for a property-secured business loan.

But the business finance landscape in Australia is changing, and there are more options available to SMEs. For many types of secured lending, you don’t need any property collateral to qualify.

For example, an Invoice Finance facility is secured by your accounts receivables. You can use existing business assets, your unpaid invoices, as security for the financing. The lender will assess the creditworthiness of your customer before agreeing to fund an invoice.

Other Types of Business Lending

If you don’t qualify for a property-secured business loan, there are several other secured lending options to help you get the cash injection your business needs. Unlike a secured business loan, an unsecured business loan does not require assets as collateral, making it an attractive option for businesses without significant assets or those seeking faster approval.

Unsecured Loans – Understanding How They Work

Unsecured business loans provide a flexible financing option for businesses that may not have substantial assets to use as security and are based solely on the creditworthiness and financial history of the business owner. This can make them particularly useful for small businesses and start-ups that need quick access to funds without the need for personal or business assets.

In general, the application process for unsecured business loans is quicker than that of secured loans since there’s no need for collateral appraisal.

However, a lender such as ScotPac will still assess the financial health of your business using bank statements and your credit history. In some cases, this can mean that while your assets are not at risk, your personal credit score could be impacted if the loan is not repaid. Compared to secured loans, interest rates associated with unsecured loans do tend to be higher due to the increased risk taken on by lenders.

Unsecured business loans offer a viable solution for businesses looking to enhance their cash flow or access funds quickly. However, a business should carefully consider their needs and the various secured finance solutions available, as there are a number of alternative working capital solutions beyond just secured and unsecured business loans.

Invoice Finance

Invoice Finance is a way for businesses that sell to other businesses on credit terms to boost cash flow by closing the gap between raising an invoice and accessing funds.

Extended payment terms are an issue for many Australian SMEs. Larger companies are often the slowest payers, with some corporates making their smaller suppliers wait 90+ days for payment.

With Invoice Finance, you can get paid for your goods and services as soon as you raise an invoice. You can get up to 95% of the invoice value as a cash advance, with the remaining balance, less fees, released when your customer pays the invoice.

There is generally no need for property security or a stellar credit history, and you can be approved and receive funding in as little as 24 hours.

Asset Finance

Asset Finance helps you fund the purchase of equipment, machinery, or vehicles for your business. The funding provider will purchase the asset for your business and use it as security for the funding facility.

This secured loan option allows you to get the tools and machinery you need to grow your business without having to make a large upfront payment. Instead, you can spread the purchase over a more extended period.

In some cases, you can also use Asset Finance to release the capital you have tied up in assets your business already owns. This is often called “asset refinancing” and can be a good way for asset-rich and cash-poor companies to raise capital.

Trade Finance

Trade Finance is a flexible type of financing designed to support businesses engaged in international and domestic purchases. It releases capital tied up in the supply chain.

You can get funding to pay your suppliers upfront and cover cash flow gaps while waiting for goods to arrive and be sold. With access to funding, you may also be able to negotiate early payment or bulk buying discounts with your suppliers.

To learn more about this type of funding, check out our guide, How Trade Finance Works.

Financing Your Company with a Business Loan from ScotPac

All businesses need funding to achieve sustainable growth. That’s where business loans can help.

Our funding solutions, including secured and unsecured loans, help you unlock the real value of your business. We’re interested in where your business is heading and helping you get the funding you need to thrive.

If you would like to find out more about secured business loans or unsecured loans, and the options available to you, contact our team of friendly business finance advisors today. We’ll help you find a funding solution, business loans or otherwise, that works for you.