In contrast to unsecured business loans, secured business loans require some form of collateral.
Secured business loans have some advantages over unsecured loans, including lower interest rates and the ability to borrow a higher loan amount.
If you are considering getting a secured business loan, let’s run through what you can use as collateral.
Residential, commercial or rural property as collateral for secured business loans
Property likely comes to mind when you think of collateral for a secured business loan. It’s the most common type of security. Before you consider using property as collateral you will want to know what the property is worth and how much equity you have in it.
For example, if you owe $150,000 on a residential property that’s worth $600,000, you have $450,000 in equity in the home. The more information you can provide a lender, the better. For some loans, the lender might want a property valuation done to confirm the value.
Marketability is another factor taken into consideration when evaluating collateral for a business loan. Lenders use this information when considering the percentage of value they will lend with secured business loans. For example, one bank mentions that they will lend up to:
- 80% of a residential property value
- 65% of a commercial property value
- 70% of a rural property value
Since residential property is less risky and can be sold faster than commercial or rural property, this lender offers a high loan to valuation ratio for this form of collateral.
Machinery and equipment as collateral for a business loan
If you own high-value machinery or equipment that you use in your business, it could be used as collateral for a secured business loan.
As with property, you will want to know the value of the asset and what you owe on it before approaching a lender for a secured business loan. You might need to pay an independent valuer to examine the machinery and provide a professional valuation. In addition, you will want to keep maintenance records to show you have taken good care of the machinery or equipment that you are proposing as collateral.
As with machinery and equipment, business vehicles are a potential form of collateral when seeking a secured loan. Again, you will need to know the value of said business vehicle/s before approaching a lender for a secured business loan.
Inventory and accounts receivable
The value of your inventory and accounts receivable can be considered by lenders as a form of collateral. You will need accurate figures showing the value of your inventory before approaching a lender for a secured business loan.
Invoice finance – also called debtor finance, receivables finance, and invoice discounting – is a form of secured lending offered by some lenders. This funding solution uses the cash ‘locked up’ in unpaid invoices (receivables) to improve cash flow and increase the working capital available to the business.
With invoice finance, the lender will pay you a percentage (usually around 90%) of the value of outstanding invoices. When the invoices are paid, you receive the rest of the money less the interest and fees charged.
Investment and business savings accounts
Investment and business savings accounts are both business assets that can easily be accessed by the lender if you can’t repay your loan, so they could be used as forms of collateral (at the lender’s discretion).
What if you don’t have collateral for a secured business loan?
If you don’t have collateral for a business loan, there are many other finance options that don’t require security. For example, banks offer unsecured business overdrafts (usually up to $50,000) or unsecured business loans (up to $50,000).
Company or corporate borrowers will need to have a guarantor who agrees to pay the debt if the business is not able to – so personal assets are at risk if the loan is not repaid.
At QPF, we can assist with both secured and unsecured loans. Get a Quote today!