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Business Loans - Secured vs. Unsecured

Business owners: here’s the difference between secured and unsecured loans.

Getting a business loan is a gateway to expanding your business and gaining momentum in your working environment. Applying for one is simple. But what is the difference between the two types of loans that everyone seems to be discussing - secured and unsecured?

Secured vs Unsecured Loans - What's the difference?

The most important thing to know about a loan is whether it is secured or unsecured. With a secured business loan, financing is secured by a valuable asset that you own (such as accounts receivable, a home or equipment) as collateral. With an unsecured loan, you are not required to provide an asset as collateral.

There are pros and cons to both loan types and knowing which one is right for your business depends on your individual circumstances and business goals. Here is a quick breakdown of the key differences:

Secured Loans Unsecured Loans
Collateral Collateral required (see examples of what can be used) No collateral required
Interest rates Seen as less risky for lenders which means a lower interest rate, usually 2.5% to 13%. Often higher than a secured loan, usually 7% to 30%.
Loan amounts Higher loan amounts, could range from $500,000 to $50,000,000 Usually less than $50,000 but can be as high as $500,000
Loan terms Typically, longer terms, 12 months to up to 30 years Typically, shorter terms, 3 to 18 months
Approval Times Stricter requirements, usually takes 3 to 4 weeks Fast application, can be approved in as little as 24 hours
How applicants are assessed
  • Value of the asset used as collateral
  • Credit history
  • Cash flow history / projections
  • Business plan
  • Tax returns
  • Other personal and business financials and more
  • Annual turnover
  • Credit history
  • Length of time in business
  • Loan amount and purpose
  • Other requirements depending on lender
Best for:
  • Established businesses
  • Financing an expansion, renovations or businesses that are refinancing
  • Businesses with strong credit history
  • Businesses that need funds quickly
  • Businesses operating for less than two years
  • Seasonal or high-volume, small dollar sales businesses
  • Businesses with less-than-perfect credit history
Watch out for:
  • If you are unable to repay a secured loan, the lender can use the collateralised assets to recoup their losses.
  • Some lenders include hidden fees or charge for early repayments
  • Higher interest rates
  • Some lenders include hidden costs and fees
  • Some lenders charge fees for early repayment

This brings us onto the second difference, the amount you are looking to borrow, will usually determine which type of loan you are able to obtain:

The period of time in which the loan is paid over (often referred to as the loan term), is another difference that can affect your choice in loan type. Here’s why:

  1. Unsecured loans offer much shorter loan terms due to risk. Terms usually range between 3 and 18 months depending on the business and its credentials.
  2. Secured loans typically carry much greater terms, with some lenders offering up to 30 years to repay the loan.

Another definitive factor is qualification, the application process which you go through with a lender often varies. As a general rule, most lenders are relatively lenient when it comes to qualifying unsecured loans, however, this is a different (rather long-winded) story when it comes to secured loans.

Lumi Minimum Requirements Bank Minimum Requirements
6 months worth of trading Character
Minimum gross annual turnover of $5,000 Collateral
Business must be Australian-registered Capacity

If you decide to apply for a secured loan through a bank, you will be faced with a more rigorous application process. The criteria is often stricter, with the funds taking considerably longer to become available in your account.

In conclusion, if you’re looking for a loan that offers more flexibility, in a short period of time, without having to pledge any of your assets as security, then to fill out an application for an unsecured loan is probably your best bet. If you’re looking for a larger sum of money ($70,000 and above), over a long period of time and you don’t have any time constraints, then a secured loan would be recommended.

Lumi Finance offers both secured and unsecured loans. Apply here. Or give one of the Sales representatives a call on 1300 005 864.

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Min 6 months in business
Active ABN or ACN
Min $5,000 monthly revenue
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