If you’re looking to raise capital to grow your business, secured lending could be an affordable way to get the funding you need.
By using an asset as security, you can reduce the risk to the lender and receive more competitive pricing in comparison to unsecured business financing.
In this guide, you’ll learn everything you need to know to determine if secured business lending is right for you.
What Is Secured Business Lending?
Secured business lending is a type of financing that uses an asset owned by you or your business, such as property, equipment, and accounts receivables, as collateral for the funding facility. The asset provides security, reducing the risk for the lender.
Generally, this type of business financing offers lower interest rates due to the asset security. If you fail to make repayments, the lender can take ownership of the asset to recoup the cost of the financing.
In contrast, unsecured business lending is not protected by any collateral. If you are unable to repay the financing, the lender does not automatically take ownership of your personal or commercial asset. But this does mean unsecured business lending is generally more expensive.
How Does Secured Business Lending Work?
Secured business lending is a form of debt finance. The finance provider will agree to lend your business an amount of money based on the value of the asset used as collateral and your ability to make repayments.
The lender will conduct a valuation on the asset and will usually want to see your financial statements. The lender will place security over the asset before you receive funding as part of the settlement process.
Repayment and funding facility terms depend on the type of secured business lending.
With a secured business loan from a bank, you will need to make monthly repayments on the principal and interest after you receive funding. Like a residential mortgage, the interest rate for a secured business loan from a bank can be fixed or variable.
More flexible types of secured business lending, like Invoice Finance, do not have monthly repayments and can be tailored to your business needs.
You can finance a single invoice to cover a short-term cash flow gap and repay the funds automatically when your customer pays the invoice.
For a longer-term funding solution, you can establish a flexible line of credit linked to your accounts receivables. When you raise an invoice, up to 95% of the funds become available to you as a cash advance.
This type of facility grows in line with your business, so your access to funds keeps up with your sales volume and working capital requirements.
What Can You Use as Collateral for Secured Business Lending?
The assets you can use as collateral will depend on the type of secured lending.
You may be able to leverage assets that you are unaware could be used as collateral for funding. Your accounts receivables, inventory, raw materials, vehicles, and equipment could all be potential ways to release capital tied up in your business and secure funding without putting your home at risk.
Getting a business loan from a bank will usually involve commercial or residential property being used as security. You may not need to own the asset outright to use it as collateral for funding. For example, if you own a 60% share of your home, you may be able to use that equity as security for a business loan.
Read our guide, Exploring Your Hidden Assets, to see if your business has any hidden assets that you can use to secure funding.
What Are the Risks of Secured Business Lending?
The most significant risk involved with secured business lending is that you could lose the asset if you are unable to make repayments. If you use a commercial asset, this could impact your ability to operate. If you use your residential property, this could mean that you lose your family home.
You should only borrow what you can afford. Before you agree to any financing arrangement, it’s essential that you are aware of the cost of the monthly repayments, any fees, and the total amount you will repay.
How Hard Is It To Get Secured Business Lending?
There is a range of secured lending options available to businesses, and some are more difficult to access than others.
It can be challenging for SMEs to qualify for traditional financing like a property-secured business loan from a bank. Around 95% of all loans to Australian SMEs are secured, with 50% of those secured by residential property:
Source – Reserve Bank of Australia
The problem for many business owners is that they do not have enough real estate equity to qualify for a property-secured secured business loan.
But the business finance landscape in Australia is changing, and there are more options open to SMEs. For many types of secured lending, you don’t need any property collateral to qualify.
For example, an Invoice Finance facility is secured by your accounts receivables. You can use existing business assets, your unpaid invoices, as security for the financing. The lender will assess the creditworthiness of your customer before agreeing to fund an invoice.
Secured Business Lending Requirements
Secured lending requirements can vary from lender to lender.
Banks and other traditional loan providers are subject to strict lending criteria while funding providers like ScotPac are much more flexible. You can still qualify for Invoice Finance if you don’t have a perfect credit rating or long trading history.
In most cases, you will need to provide up-to-date financial statements to support your funding application. Lenders will want to see proof of your turnover, profit and loss statements, and a cash flow forecast.
Read our guide to learn how to create a cash flow forecast for your business.
What To Look For in Secured Business Financing
Secured business lending is usually associated with long-term financing arrangements. But there are short-term options, including Invoice Finance and cash flow loans.
Whether you’re looking for long term or short term financing, you should consider the following features when comparing your options:
The higher the interest rate, the more you will pay for the financing. Interest rates can be fixed or variable and are calculated based on your creditworthiness, the value of the asset you put up as collateral, and other factors like the type of financing.
Fees and Charges
Many funding providers charge an upfront fee and ongoing fees. You may also be charged additional fees if you miss a repayment. Make sure you understand all the fees involved before applying for funding.
The faster you can repay the funding, the less it will cost you in interest fees. But some providers charge penalty fees for early payment.
Check the repayment schedule and see if there is any flexibility so that repayments can be tailored to your cash flow needs.
Types of Secured Business Lending
If you don’t qualify for a property-secured business loan from a bank, there are several other secured lending options to help you get the cash injection your business needs.
Invoice Finance is a way for businesses that sell to other businesses on credit terms to boost cash flow by closing the gap between raising an invoice and accessing funds.
Extended payment terms are an issue for a huge amount of Australian SMEs. Larger companies are often the slowest payers, with some corporates making their smaller suppliers wait 90+ days for payment.
With Invoice Finance, you can get paid for your goods and services as soon as you raise an invoice. You can get up to 95% of the invoice value as a cash advance, with the remaining balance, less fees, released when your customer pays the invoice.
There is generally no need for property security, and you can be approved and receive funding in as little as 24 hours.
Asset Finance helps you fund the purchase of equipment, machinery, or vehicles for your business. The funding provider will purchase the asset for your business and use it as security for the funding facility.
It’s a way for you to get the tools and machinery you need to grow your business without having to make a large upfront payment. Instead, you can spread the purchase over a more extended period.
In some cases, you can also use Asset Finance to release the capital you have tied up in assets your business already owns. This is often called “asset refinancing” and can be a good way for asset-rich and cash-poor companies to raise capital.
Trade Finance is a flexible type of financing designed to support businesses engaged in international and domestic purchases. It releases capital tied up in the supply chain.
You can get funding to pay your suppliers upfront and cover cash flow gaps while waiting for goods to arrive and be sold. With access to funding, you may also be able to negotiate early payment or bulk buying discounts with your suppliers.
To learn more about this type of funding, check out our guide, How Trade Finance Works.
Financing Your Business With ScotPac
All businesses need funding to achieve sustainable growth.
Our funding solutions help you unlock the real value of your business. We’re interested in where your business is heading and helping you get the funding you need to thrive.
If you would like to find out more about secured business lending and the options available to you, contact our team of friendly business finance advisors today. We’ll help you find a funding solution that works for you.