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Commercial Loans: Secured vs Unsecured

Are you looking to start a new business, expand your operations or simply need some financial support to stay afloat? A business loan is often a great solution. But when it comes to commercial financing, should you go with a secure or unsecured loan? Here, we break down the differences and explain the pros and cons of both.

What is a secured commercial loan?

A secured loan is a type of funding that requires security for the money to be approved. Essentially, in the event that you default on the loan, your lender has ‘security’ in the form of an asset that can cover the outstanding balance, fees or interest. It’s a lower-risk option for lenders compared to unsecured loans and is therefore more common in commercial lending.

Security can take the form of anything from property and assets, to inventory, vehicles and accounts receivable.

What is an unsecured commercial loan?

In contrast, an unsecured loan is one that doesn’t require any asset of yours to be secured against the loan. Instead, the lender will assess the strength of your cash flow and business viability to determine whether an unsecured loan is a smart decision on their part.

As unsecured loans are riskier for lenders, they tend to incur higher interest rates.

Pros and cons of each

If you’re unsure which option is right for your business-lending needs, here are some of the pros and cons to consider.

PROS: Secured loan

  • Lower interest rates and higher borrowing power compared to unsecured loans.
  • You can borrow against your own assets, which is helpful for small businesses and startups who may not currently have strong cash flow.

CONS: Secured loan

  • The approval process tends to be longer as the lender needs to consider what type of security is appropriate.
  • Your lender may require value assessments and additional proof of asset ownership, which means more paperwork.

PROS: Unsecured loan

  • The strength of your cash flow is the ‘security’ (although this can be a con if you don’t have healthy cash flow), rather than putting up your own assets.
  • Approval is generally faster than secured loans and you may need less paperwork upfront.

CONS: Unsecured loan

  • Higher risk means higher interest rates.
  • Depending on the lender, you will probably only be approved for a smaller amount compared to getting a secured loan.
What you need to provide your broker

Whether it’s secured or unsecured, getting a commercial loan isn’t as complicated and time-consuming as you might think.

Many people assume, incorrectly, that they need to do their full business financials and have everything organised before they even think about approaching a lender. But in most cases, applying for a commercial loan only requires you to provide your ID and a recent business bank statement. If you want to secure a loan against your business property, for example, you may need to provide a rates notice and recent mortgage statement as well, but everything else is very straightforward.

“We work with hundreds of business owners every month to get the financing they need, be it secured or unsecured,” says David Crook, Managing Director of Nero Financial. “Most of our clients are surprised by how easy and fast the process is. And honestly, we love the more challenging cases, so no matter what obstacle you think you’re facing, we’ll help you navigate the commercial lending space for a result you’re happy with”.

No matter what type of commercial loan you need, we will work alongside you to find the right financial solution. Contact Nero Financial today or call 1300 025 949 to find out how our team can help with business lending.