Types of Secured Business Loans

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 further than our #1 rated provider here on Small Business Loans Australia:

The Lend Secured Business Finance Engine

No.1 on SmallBusienssLoansAustralia.com due to its diversity of funding options and speed to finance. As a business loan marketplace, Lend works with 50+ SME lenders, including lenders who specialise in secured lending – whether that’s lenders who take a charge in general lieu of business assets or take a charge over specific assets/property. By utilising Lend, businesses can easily discover the most appropriate lender for them. If the type of loan a business is applying for is not appropriate for their industry or financial situation, Lend continues to match the business with more lenders and more types of loans (doing all the legwork of approaching multiple lenders at once).

Top Secured Lenders Available Through Lend.com.au

This is just a small sample of secured business lenders available through the Lend.com.au portal. By making one 5-minute application, in which you specify the type of loan your business requires and upload recent copies of your company’s bank statements, Lend will automatically approach numerous lenders on your behalf, having no impact on your credit score until the point you decide to make a formal application. Lend will only recommend a lender if they believe your business has a good chance of being approved.

What is a Secured Business Loan?

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.

How Does the Process Work?

Let’s illustrate this with an example:

1. You apply for a loan and offer the lender your residential property as security against the loan.
2. The lender assesses your application and gives a conditional offer, dependent on an independent valuation confirming the property’s value and suitability as security.
3. Most likely, you are required to pay an upfront fee to cover the lender’s costs in valuing your asset (the property) as well as any legal fees should the lender want to place a charge over the property.
4. If everything goes according to plan, the lender values your asset at higher than the value of the loan (lenders typically have their own lending policies about the size of loan they are prepared to issue as a % of the total asset value but this is typically 80-90%).
5. The lender legally takes a charge over the asset (in this case your property).
6. The funds are issued generally within 24 hours of everything being approved.

How Popular are Secured Business Loans?

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 early 2023, the latest figures published by the RBA are for the month of December 2022. The outstanding balance of small business debt (i.e. the amount currently loaned to small businesses in Australia) was $142,019 million, with $68,160 million of this being secured by residential property. 

The proportion of loans which are secured vs unsecured for SMEs is higher than that of large business as SMEs are generally considered to be more high risk. In short, small businesses need to provide collateral and go down the secured business funding route as historic lending data shows SMEs are more likely to default on a loan than individuals and large corporations. 

Secured Loans Vs. Unsecured Loans

What Can be Used as Security in a Secured Business Loan?

The most common assets to utilise for 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.

Be aware that you’ll almost certainly be responsible for any valuation fees that apply on the asset you’re using to secure the loan. Oftentimes, lenders will have a partner that can value the asset on your behalf. Be sure that the lender’s valuation of the asset is fair and in line with what you were expecting.

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.

Fixed Charge

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 residential 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 that 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.

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 which are eligible under a floating charge 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.

Director’s Guarantee

Some online lenders do not ask for a fixed or floating charge in order to secure a business loan, as they understand that this is often a major stumbling block for SMEs to access finance, particularly for non-homeowners. A recent SME survey by Banjo Business Loans found that one in five SMEs were prevented from accessing finance due to a lack of property. Instead, some SME lenders ask that a director provides a director’s guarantee to repay the loan. This prevents the borrower from requiring any specific asset to act as collateral on the loan, but it does mean that a director is personally liable to repay the loan if the business is unable to do so. While it prevents the worst-case scenario of losing a property, the director could find themselves in debt for many years if things go wrong for the business.

Read more: Do Business Loans Require Personal Guarantees?

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 should 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 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.

Alternatives to a Secured Business Loan

If a secured loan doesn’t seem like the right fit for your business, there are other financing options available. In addition to unsecured business loans, which can be more expensive in terms of interest but generally much quicker to access, you might consider revolving facilities such as business credit cards, a line of credit or a business overdraft.

Low Doc Business Loans

Low doc business loans (and even no doc business loans) allow businesses to access business finance without providing extensive financial statements. In the absence of financial statements, low doc business loans are often residentially secured or asset secured. And rather than borrowers providing financial statements, they are usually required to provide copies of their recent bank statements. Low doc business loan providers will still want to ensure borrowers are able to repay the loan so they’ll be checking things like the average daily closing balance and the income into the account.

Low doc business loans are a common form of sole trader business loan as self-employed individuals may have a shorter operating history or simply don’t have the financial statements or supporting documentation that would be required for traditional business loan approval. That’s not to say established businesses don’t utilise low doc business loans either – many prefer the streamlined approach of low doc/no doc business loans. The quickest method to gain fast approval is by applying online with a specialist non-bank lender and businesses of all sizes are becoming increasingly aware of this.

Common applications of low doc business loans are for construction or commercial property investment. Commercial bridging loans are a popular type of low doc business loan – these are always secured and a clear exit strategy is required.

Security isn’t always a must to qualify for a low doc business loan and an unsecured business loan through an online lender will almost always involve less documentation than a loan through a bank.

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.

Final Words Prior to Partaking in Secured Business Financing

Around 50% of all small business loans in Australia are residentially secured. When we consider the significant use of other types of secured finance like equipment and vehicle finance, secured lending is easily the most common source of funding for SMEs. On the whole, secured business loans should be cheaper and more accessible than unsecured loans, but secured business finance will generally take longer to receive and will leave you, as the borrower, more exposed in the event of default. As always, make sure you have a clear understanding of the total cost of the loan and the ongoing impact this will have on your working capital.

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 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.