Choosing to apply for a small business loan is a big decision, but it can also be accompanied by many questions. What will you use the funds for? Are you eligible? And what type of loan will serve your SME best?
Of all questions, the last one is perhaps the most important. Small business owners frequently have to consider if a secured or an unsecured loan is best for their venture. Today, we’re going to discuss these two common types of loans, as well as what their major differences are.
Collateral
Put simply, collateral is an asset you own that is pledged as security for repayment of a loan. This must then be forfeited in the event of a default. While secured loans do require collateral, applying for an unsecured business loan means you do not offer your family home or other personal assets as collateral. You are safe in the knowledge that whatever happens in business, your personal assets won’t be at risk.
Essentially, an unsecured business loan is issued and supported only by the borrower’s creditworthiness. Rather than putting up collateral, a personal guarantee from the directors of the business must be supplied.
Read more: How to get a small business loan without collateral.
Loan Amount
Another difference between secured and unsecured business loans is the amount you can borrow. Because a secured business loan requires collateral (and is therefore less risky to lenders), applicants can often borrow larger amounts, ranging from $250,000 to $50,000,000.
Unsecured business loans, on the other hand, usually range from $50,000 to $100,000, but can be as high as $500,000. While some applicants may see a lower loan amount as an obstacle, it can be beneficial for your business. Smaller amounts are not only easier to pay back, but also result in more affordable repayments.
Loan Term
Secured and unsecured business loans also differ in terms. Secured loans typically carry longer terms ranging from 12 months to up to 30 years. With unsecured business loans, applicants must often repay their loan within 3 to 18 months.
Again, a shorter loan term isn’t necessarily a bad thing, as it allows a business owner to repay their loan quicker, therefore accruing less interest due to the shorter time frame.
Qualification
Unlike secured business loans, unsecured loans have been designed so that they’re easier to obtain. In fact, many lenders (like Lumi) will consider your application if you’ve been running an Australian-registered business for at least 6 months, with a minimum gross annual turnover of $50,000.
Lenders offering secured loans (such as banks) tend to have much stricter criteria. They often require multiple years in business, near-perfect credit history, and significantly higher gross annual turnovers.
Read more: How to apply for a small business loan: what you need.
Flexibility
Unsecured business loans are known to be flexible funding solutions for small businesses. Not only do you have greater control to choose the loan amount you desire for the time you need it, but some lenders also allow you to repay early without penalty. Each lender is different, however, so you must do your due diligence to make sure this is an option for your business.
Application
If you require a small business loan within as little as 24 hours, then an unsecured loan is your best option. Understandably, many SMES require their funds as soon as possible. Therefore, they simply cannot wait the lengthy time frame that a secured loan through a traditional institution would take.
Did you know that a secured loan may require a business owner to sit down with their financial institution multiple times before they’ve even been approved? Alternative lenders like Lumi, however, offer fast and simple online applications which can be completed within just minutes.
Read more: How to get a short term business loan within 24 hours.
If you’re considering applying for an unsecured business loan to boost your venture, please visit our website for more information or call us on 1300 00 LUMI.
