HOW TO CHOOSE BETWEEN SECURED AND UNSECURED LOANS?
Business owners use different types of credit instruments to finance their critical expenditures. Secured and unsecured loans are two broad credit options to consider when taking a loan. While secured business loans require borrowers to submit collateral to lenders, unsecured loans do not. Both types of loans help business owners access much-needed cash. However, these loans have some crucial differences that every borrower must understand. Let’s break down their differences and decide how to choose the right option for your business.
Secured Loans: Salient Features to Keep in Mind
Secured loans require the submission of collateral to provide security to the lender. Here is what you need to know about such loans:
● Interest Rates: The collateral minimises the lender’s risk. As a result, they provide lower interest rates to borrowers.
● Loan Amounts: Lenders may be willing to approve larger sums when borrowers submit collateral. Business owners can apply for sums as high as $50M by putting up security.
● Loan Term: The loan term is usually higher for secured loans. The loan repayment period can span several years up to 30 years. Lenders determine the loan terms depending on each borrower's unique requirements
● Approval Process: Secured loans require comprehensive approval processes. However, you can expect a pre-approval time of 24-48 hours and an unconditional approval time of 2-3 weeks
Secured business loans can be low doc where they primarily lend basis market value of the property. Whereas, under full doc option, lenders evaluate factors like the borrower’s business projections, credit history, tax returns, asset value and more before approving these loans.
Unsecured Loans: Salient Features to Keep in Mind
Unsecured business loans are convenient credit options for business owners who want quick loans without collateral. The salient features of these loans are:
● Interest Rates: The interest rates for unsecured loans are usually higher as compared to a secured business loan.
● Loan Amounts: The loan amount for an unsecured loan max out at $500,000.
● Loan Terms: Unsecured loans have shorter terms than secured ones. They usually extend between 3-36 months.
● Approval Process: Unsecured loans require minimal documentation. The pre-approval is possible in as low as 2-4 hours and unconditional approval and settlement process can happen within 24-48 hours.
Lenders assess the applicant's credit history, business performance, annual turnover, and related factors while approving unsecured loans.
When Should You Go for a Secured Loan?
Secured loans are excellent for new/start up business where there’s not much tradimg hostory and they can go for low doc options. The same is also popular among established businesses that have bigger loan requirement and has security assets to offer.
When Should You Opt for an Unsecured Loan?
Smaller businesses with short term cash flow requirements may opt for unsecured loans to get a quick infusion of cash. Businesses looking for loans up to $500,000 often find excellent credit options in the unsecured space. They may
have to pay a slightly higher interest rate. However, these loans help them access money quickly to meet their urgent business needs.
Now that you know how to choose, you can consult a top finance broker in Australia for help. They can help you shortlist the best credit options and finalise your applications in no time!