Secured vs Unsecured Business Loans - Which Is Best?

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What Is A Small Business Loan? 

You're might already be familiar with personal loans from the bank or independent lenders. Business loans are a little bit different. A small business loan is fixed-term loan (usually six months to five years), with an agreed repayment schedule. The interest rates can be fixed or floating (or a combination of both), and your repayments could be regular (usually monthly) or tailored to match your cash flow. 

Should I Apply For A Secured Or Unsecured Business Loan? 

Secured loans are generally offered by traditional lenders like the high street banks. 

If you have assets (such as land, property or equipment) to offer as collateral and your business qualifies for a secured loan, it is well worth considering – since secured borrowings are low risk to the lender, they tend to have the lowest interest rates. 

What’s more, banks are tightly regulated so you shouldn’t have to contend with unreasonable borrowing conditions or hidden charges if you apply for a secured loan. 

However, getting a business loan from a bank is not always easy. They have very strict lending criteria and generally only lend to well-established businesses with excellent credit ratings and several years’ profitable trading history. 

Even if you do meet the banks’ stringent requirements, you can expect to go through a slow and arduous application process to get the business loan you are seeking.  

Shaun McGowan from business loans website Lend says, "Most small business loans are around $30,000 and for a bank, the process is the same whether you want to borrow $30,000 or $3 million. For an alternative finance lender, once you provide your business bank statements, they're able to make a lending decision." 

How To Apply For A Secured Business Loan From A Bank 

Before you begin the loan application process, you’ll need to do a lot of preparation. Your bank will expect to see a detailed business case for the loan, showing how you intend to use the funds, as well as comprehensive supporting documents. These may include: 

· Full financial statements 
· Bank records 
· Credit sales/merchant records 
· Sales contracts or orders 
· Cash flow projections 
· Business or strategic plans 
· Personal and business credit records 
· Ownership documents for the assets you are offering as collateral 

Once you’ve prepared your documents you’ll need to complete the bank’s application form. You may need to visit your bank to lodge your company's application, at which point they will check all your documents and request any additional information. 

The bank will then assess your application using an evaluation process based on these criteria: 

· Collateral – do you have clear ownership of the assets you are offering as security and does their value equal or exceed the amount you wish to borrow. 

· Character – is your credit score high enough, and does your business have a good record of meeting its financial and other obligations to customers, suppliers and creditors? There are alternatives for small businesses with bad credit score, but make sure you do your research and choose the best one for your needs.

· Capital – do you have equity built up in your business, or are you financed entirely by debt? 

· Capacity – this is the most important consideration. Do you generate enough profits to service your loan repayments, and do you have sufficient resources to stay liquid even if your income fluctuates, interest rates rise, etc? 

There is a fifth criterion, ‘Conditions’, which applies more to alternative lenders than to the high-street banks. These may be willing to offer you a loan even if you score low on the other criteria (except capacity), provided that the conditions are sufficiently favorable to them. 

Traditional lenders can take weeks, or even months, to process a secured loan, which is why even businesses who could qualify for secured bank finance often turn to the alternative finance market instead. 

The Advantages Of An Unsecured Business Loan 

There are three main advantages to unsecured business finance: 

1. Accessibility – provided you have capacity to repay your loan (and if not, you really shouldn’t be contemplating business finance) and have been trading for around six months, there is a good chance you’ll be able to find a lender in the fintech market. Alternative lenders assess applications using the same ‘five c’s’ criteria used by the banks, but tend to have a much higher risk tolerance. Some even specialize in lending to businesses with poor credit ratings – at a price, of course. 

2. Ease – applying for an unsecured business loan is usually quick and simple – you’ll need much less supporting documentation and can usually apply online. 

3. Speed – most online lenders will assess your company loan application within a few days, with many giving on-the-spot answers. You could even have the funds in your account in a matter of hours. 

The Cost Of Unsecured Business Loans 

As mentioned above, unsecured business finance is sure to be more expensive than a secured loan, because of the increased risk to the lender. In addition to the advertised interest rate there may be hidden charges – such as transaction or transfer fees. 

You will also need to check the terms and conditions very carefully before you apply for an unsecured loan, as some lenders will impose restrictive conditions which could be detrimental to your business. 

If in doubt, a professional financial advisor or loan broker will be able to help you compare business loans and to choose the best product to suit your specific needs and circumstances.

You may also prefer looking into direct lenders for installment loans for quick and secure personal loans

I hope you enjoyed this article about determining whether secured vs. unsecured business loans are best for your company.

Interested in more articles about frugal finances and loans?

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