Secured Business Loans Australia: A Complete Guide
Attaining secured small business loans in Australia is much like the process for seeking unsecured small business loans. As well as the big four banks, there are a number of Online FinTech Lenders who offer Secured Business Loans in Australia too.
In this complete guide we run through what secured business funding is, the best secured loans providers in Australia, the benefits and risks of taking secured business finance and whether bad credit secured business loans are possible. We also compare secured business loans vs. unsecured business loans so readers can make an informed decision as to which product is most suitable for their business requirements.
Types of Secured Business Loans
|Loan Type||Securities||Terms||Avg Loan Size||Estimated Interest Rate|
|Secured Loan (Generic)||Secured||1-10 years||$100,000||3%-12.5%|
|Invoice Finance||Invoices||3-180 days||$10,000||3%-5%|
|Merchant Cash Advance||Pending Digital Payments||1-2 months||$20,000||15%-25%|
|Equipment Finance||Equipment||1-5 years||$75,000||6%-15%|
|Asset Finance||Asset||1-7 years||$100,000||1.6%-15%|
|Business Overdraft||Secured or Unsecured||Ongoing||Varies||5%-12.5%|
|Caveat Loans, Second Mortgages, Commercial Bridging Loans||Secured against Land||1-12 Months||Varies||12%-18%|
Best Secured Business Loan Providers in Australia
For the best secured loans in Australia (NSW, Queensland, or Melbourne based businesses are welcomed), there is no need to look any further than use our #1 rated provider here on Small Business Loans Australia:
The Lend Secured Business Finance Engine
Lend (lend.com.au) is our best rated platform on SmallBusienssLoansAustralia.com due to its diversity and speed, and when it comes to secured business loans which is somewhat of a tricky domain, using Lend to discover the most appropriate funding for you and getting responses from multiple lenders could be the best course of action. If the type of loan you were applying for is not apt for your financial statement, Lend would continue matching you with more lenders and more types of loans (doing all the legwork for your small business).
What is a Secured Business Loan? How Does the Process Work?
A secured business loan is a loan provided to a business which is secured by property or assets. Typically, secured business loans are secured by property but it is common for valuable items owned by a business to be used as collateral too. If, at a later point, borrowers are unable to repay the loan, the lender has the right to sell the asset to get their money back. If the asset is sold for a greater value than the pending unpaid balance on the loan (which it likely will be) then the borrower is entitled to the remaining funds generated from the asset sale.
Lending to business statistics collected by the Reserve Bank of Australia and our own Australian business lending industry analysis show that roughly 50% of all business loans in Australia are secured by residential property. As of June 2021, the latest figures published by the RBA are for the period covering March 2021. The outstanding balance of business debt (i.e. the amount currently loaned to businesses) was $141,460 million, with $68,410 million of this being secured by residential property. Bear in mind the data includes businesses of all sizes, the proportion of loans which are secured vs unsecured for SMEs is likely to be higher as SMEs are generally considered to be more high risk. In short, they the need to provide collateral and go down the secured business funding route is as often the nature of the beast for a lot of SMEs.
Secured Loans Vs. Unsecured Loans
What Can be Used as Security in a Secured Business Loan?
The most common assets to utilisite for a secured business funding are typically commercial and residential property. But ultimately, any number of assets can be used as collateral providing the loan issuing company believes them to be of sufficient value. You could also use:
- Commercial Vehicles
- Business Equipment
- Commercial Construction
- Business Inventory
- Future Invoices (Invoice Financing)
- Business itself for a business purchase loan
When a movable asset is used as collateral, such as a company vehicle in business vehicle finance, the term ‘chattel mortgage’ is often used and it means just that – a charge over an asset which does not remain in a fixed location like a property does. A chattel mortgage is commonplace for equipment and asset finance.
Times are moving fast and non-bank lenders are constantly trying to diversify the type of assets they will accept as collateral. One Australian founded Fintech is even happy to accept bitcoin and other crypto assets as security for a business loan. The online lender, Fifit, accepts Bitcoin as collateral, and will consider other cryptocurrency assets that can be used to secure a business loan too.
Fixed Charge vs Floating Charge (and a Director’s Guarantee)
Depending on the lender and type of secured business finance being issued, either a fixed or floating charge will be taken over the borrower’s assets. Understanding the difference between the two is important should the unlikely predicament happen that a business has to default on their loan.
A fixed charge is attached to an identifiable asset. This could be land, property, machinery, company vehicles and much more. The business does not typically sell these fixed assets but it could be a key piece of machinery for the manufacturing of its goods. The most common fixed charge is a mortgage – borrowers must keep up with their mortgage payments otherwise they risk having their house sold. When selling their house, they also need approval from the lender too. With a fixed charge, the lender has full control of the company asset. Equipment finance and asset finance will almost certainly be secured by a fixed charge over the asset it is being purchased, thus a chattel mortgage is another example of a fixed charge. Should the borrower wish to sell the asset they will either need to repay the loan in full or seek the approval of the lender. Should a business default, a fixed charge takes priority over a floating charge.
The term floating charge is very appropriate – with no fixed asset that it covers, a floating charge is a charge that floats over ever-changing business assets. A floating charge allows more freedom for a business. While a fixed charge protects the lender, the floating charge gives more freedom for the company to sell, transfer or dispose of their business assets without seeking approval from the lender. Business assets are eligible under a floating charge which could include inventory, machinery (if not directly used for a fixed charge) and really anything that the business owns – which could include furniture, coffee machines and company cars.
Some online lenders do not ask for a fixed or floating charge in order to secure a business loan. Understanding that this can often be a stumbling block for SMEs to access finance (particularly non-homeowners), they ask instead that a director provides a director’s guarantee to repay the loan, should the business be unable to. This prevents a borrower requiring any specific asset to act as collateral in a loan but does mean a director is personally liable to repay the loan, should the business be unable to. Whilst it prevents the worst-case scenario of losing a property, the director could be burdened by debt for many years.
What are the Benefits of a Secured Business Loan?
When a business provides security for a business loan it means one thing – less risk for the lender. And with less risk, theoretically, should come a better interest rate. If a business has reliable income and is growing with improved cash flow then providing security can be a great way of reducing the amount that the business has to pay back. By providing security, a business may also be able to receive a higher loan amount than if they took an unsecured business loan.
What Risks are Associated With Secured Business Finance?
It may sound rather obvious but it has to be said – if a business takes a secured business loan and is unable to repay the loan, they risk losing the asset that is used as collateral in the loan. This could be particularly damaging for businesses if it’s an integral piece of machinery or the business property. In some cases, if a personal vehicle or property has been used to secure the loan then the impact isn’t just limited to the business either.
Better interest rates and a higher loan amount might certainly sound appealing, but as with any loan borrowers should never borrow more than they can afford. Be aware of the total repayment costs at the onset of the loan.
Key Considerations Before Taking a Secured Business Loan
Just like when applying for an unsecured loan, businesses must be sure of what they are seeking from a lender when taking a secured business loan in Australia. The fundamentals to consider would be the breadth of lending solutions each lender offers, the reputation of the lender and the cheapest interest rate that can be found.
On top of this, there are a number of other considerations specifically relating to secured business lending:
- The asset is the primary focus of the lender, so there will be less of an emphasis on business cash flow and the business credit score. These will of course still count to some degree.
- Secured loans will have a loan-to-value ratio (LTV), i.e. a borrower could be eligible for finance up to 80% of the asset used as collateral.
- Any asset used as collateral for secured business lending should be professionally valued. This is particularly true for second hand assets. Borrowers should be completely aware of its value, with the lender valuing it the same.
- Businesses don’t have to use personal assets as security and often there is no need. Should a business use a personal asset as security, they must understand in the worst-case scenario what would happen if they lost this asset.
Bad Credit Secured Business Loans
If a business has a bad credit rating, then they will almost certainly not get the lowest and cheapest rate for a small business loan. This is because lenders will think it’s risky to lend to that business. If a business has a poor credit history it can also be much more difficult to get the finance needed in the first place. Some lenders however are more likely to consider lending to businesses with bad credit if security is provided. Be sure to understand each loan provider’s minimum criteria in the first instance to avoid wasting precious time and even more importantly, potentially damaging the business credit score with a number of rejections. OnDeck, for example, requires a minimum credit score of at least 500, meaning some firms rated with a ‘poor’ credit score could still stand a chance of getting funded (Poor 0 – 509). Learn more about bad credit small business loans and business credit scores in Australia with our dedicated articles.
We hope you’ve enjoyed reading our guide to secured business loans Australia. Whilst ‘unsecured business loans’ have seen huge growth over the last two decades, it’s easy to forget that it is possible to provide security for your business loan, and with this, receive preferential loan terms in the process. It may not always be the right option for your business but we hope with the help of our balanced article it’s helped to provide you with a greater understanding as to whether secured business finance is the right option for your business. For any inaccuracies or simply for more information on secured business funding please do get in touch.