Securing the right financing can pave the way for the growth and stability of your business.
A secured business loan could be your key to success if you’re considering expansion, refinancing, or managing everyday business expenses.
This guide will demystify how to receive financing with security to help unlock your business’s potential and propel you towards your financial goals.
What Is Security in Business Loans?
Security in business loans refers to the protection a lender has if you, as a borrower, default on your loan.
It includes assets and legal agreements allowing the lender to recoup their funds.
Such agreements can include
- Personal guarantees: This is a promise made by a business owner or another individual to personally repay the loan if the business cannot.
- Mortgage over real property: The lender may require you to offer your home or business premises as security. If you default on the loan, the lender can take possession of this property to recover the loan amount.
- Security over personal property: Here, personal assets such as equipment, vehicles, or inventory could be used as security. The lender can seize and sell these assets if you fail to repay the loan.
Are All Business Loans Secured?
Not all business loans are secured.
If you want to get a loan for your business without security, an unsecured loan could be the way to go.
They’re a good choice if you don’t have assets to pledge or are uncomfortable risking them.
Due to the elevated risk for the lender, unsecured loans usually have higher interest rates and more rigorous repayment conditions.
On the other hand, secured loans typically offer lower interest rates and higher borrowing limits because they pose less risk to lenders thanks to the security involved.
This loan could be a better option if you’re looking to borrow a large amount and have an asset you’re willing and able to use as security.
The borrower generally chooses between a secured or unsecured loan based on their needs and capabilities.
However, the lender has the final say in approving the loan and its terms.
What Assets Can Be Used As Security for Business Loans?
Using assets as security for business loans can make your loan application less risky for the lender, which could result in more favourable loan terms, like a higher loan amount or a lower interest rate.
What kind of assets?
Commercial property refers to real estate used for business purposes, such as office buildings, warehouses, retail spaces, and factories.
When you use commercial property as security for a secured business loan, you’re essentially promising the lender that they can seize the property to recoup their loss if you fail to repay the loan.
Equipment refers to high-value machinery or technology your business uses.
- Construction machinery
- Commercial kitchen equipment
- High-end computer systems
- Specialised medical devices
Like commercial property, you can use high-value business equipment as collateral for a secured business loan.
If you do not repay the loan, the lender can take possession of this equipment.
Equity in a business context refers to the ownership interest in a company.
Basically, it’s the value left in your business after subtracting your liabilities (what you owe) from your assets (what you own).
Some lenders may allow you to use your equity in other assets- like a home or another property– as security for a business loan.
By leveraging your equity, you’re offering the lender a claim against these assets if you can’t repay the loan.
What Is the Difference Between Collateral and Security?
Collateral refers to the specific assets you pledge to a lender when applying for a secured loan.
Security is a broader term encompassing the entire agreement that protects the lender if you default on the loan.
While collateral is a part of this agreement, security also includes other components, like the loan agreement terms and the legal processes the lender can initiate if you default.
Do You Need Help Understanding Security for Business Loans?
So, what can you use as security for a business loan?
Speak to the team at Pherrus Financial Services for the answer!
Our team has the skills and experience to help you understand what security a lender may require for a business loan application.
We can then guide you through the process.
Fill in our online form, and we’ll be in touch shortly.
Alternatively, call us on +61 (02) 9099 9109 to book an appointment at our Bella Vista office in Sydney, NSW.