Are Small Business Loans Secured or Unsecured?
As a business owner, you’d always want to know your financing options to help with business growth — one of the most common is small business loans.
Here’s everything you need to know about secured and unsecured business loans and how they can help your business grow.
What Are Small Business Loans?
Loans can help manage business cash flow and improve your performance as a business. You can use the money to upgrade or acquire more tools to provide better services to others.
You can apply for a small business loan from a bank, financial institutions, and non-bank lenders.
They can be either unsecured or secured, depending on the terms and your personal situation.
Secured vs. Unsecured Business Loans: How Do They Differ?
Secured business loans require an asset, like a property or a vehicle. This allows a business to get a loan with typically more flexible terms and a better interest rate.
They usually take longer to process because they’re more detailed than unsecured loans.
On the other hand, unsecured business loans don’t require assets. As a result, they can have stricter terms and higher interest rates than secured loans.
They’re assessed based on your business’s financial history and the credit scores of its directors.
Advantages and Disadvantages of Secured Loans
These are the common advantages of secured financing.
- Fewer risks – partnering with banks is known to be less risky because they naturally look for secured ways when financing.
- Lower interest – since you’re required to have collateral, you can use assets to secure your loan. Some can even add personal assets, like residential property, for a more personal guarantee.
- Convenient – with online banking, it’s easier to track your business account during your loan term.
While it has many advantages, they also have drawbacks that make it harder to get approval.
- Needs good credit history – your bank will look into your bank statements and business assets. In some cases, they can also look into your personal credit history.
- Needs collateral – your collateral needs to be approved by the bank to qualify.
- Longer process – a bank can take a few business days to review your financial information before approval.
Advantages and Disadvantages of Unsecured Loans
These are the benefits of applying for an unsecured business loan.
- Flexible criteria – an unsecured loan is usually adjusted based on your business needs. You can choose between a fixed interest rate or variable interest rates.
- Easier and faster application – a fast unsecured business loan requires fewer documents. You can usually get your loan amount in one business day.
- Rates and fees – if you’re looking into non-bank lenders, you’ll notice they often offer more competitive interest rates.
While they can have benefits that address the setbacks of secured options, an unsecured business loan also has drawbacks.
- Maximum loan amounts – while they’re flexible to cover your expenses, their amounts are still limited and rely heavily on how you can repay your desired loan.
- High-interest rates – lenders use these to determine a borrower’s creditworthiness. Since there’s no asset security, they must ensure your business can maintain its cash flow while you repay your loan amount.
- Minimum requirements – lenders would prefer that you fit a certain minimum annual turnover and have been in the business for a while to receive approval.
How to Choose Unsecured Small Business Loans
These are the common factors Australian businesses need to look into when choosing an unsecured business loan.
- Affordability of repayments – know the conditions when you pay for your loan. They should be doable for your business, regardless of whether you have a slow day.
- Total cost – loan costs include interest rates that should be repaid when you get unsecured business finance.
- Additional fees – always check for hidden fees and additional costs. It’s best to look for a transparent lender with their charges so you can factor them in when choosing your unsecured business loans. Look into early repayment fees and if you can pay your loan early.
Small Business Loans Application Process
Secured and unsecured business loan applications usually follow a simple application process.
- Compare the different secured and unsecured business loans and their terms. If you’re going for a secured loan, you may need to double-check if your asset qualifies for collateral.
- Complete your loan application. Most application processes for different loans can be done online. Provide a personal ID, your ABN, and records of your business finances and activities.
- Get approved. Your lender will provide you with different options, depending on your qualifications. An unsecured small business loan can take a few hours, while a secured small business loan may take longer.
- Repay your loan. To ensure that you get better offers in the future, it’s best to start building your history and maintain a good repayment scheme. Remember the repayment frequency to avoid future late payment fees. Always repay the interest and other fees on time.
FAQs
Let’s discuss the most common questions about unsecured business loans.
How Much Can I Borrow With an Unsecured Business Loan?
Lumi’s unsecured business loans range from $5,000 to $500,000. They can depend on repayment and financial history.
You can easily apply for an unsecured loan and get the funding within one business day for easy access to cash, provided that you give us all the required information for a swift approval process.
What Are the Different Kinds of Small Business Loans?
Small business owners have many options when applying for an unsecured business loan.
You can consider the following from banks and alternative business lenders.
- Small business line of credit – this operates like a business credit card, allowing you to borrow a specific amount from your lump sum with interest.
- Asset-based loan – this helps businesses secure financing on a collateral basis, like inventory or accounts receivable.
- Invoice factoring – invoice financing relies on outstanding invoices sold to the lender for advancements on money and unpaid invoices from your clients and customers.
- Merchant cash advance – this is funded from a specific provider based on future credit card sales of your business.
- Small business term loans – these short-term financing aims to fill in the specific need for helping a business achieve growth.
- SBA loans – this is a low-interest and low-term loan guaranteed partially by the government.
- Business overdraft – these are linked to your transaction account to help your business get funds beyond what you have in your bank account as long as it’s within the approved total limit.
- Business credit cards – like personal credit cards, you can use these for business purposes, like to purchase inventory or pay ongoing fees.
Conclusion
With many options for secured and unsecured business loans, you can efficiently work on getting better opportunities as a business.
If you’re considering borrowing money to broaden your horizons as a business, Lumi has excellent finance options to address your needs!
