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There are a variety of loans available to help fund for business expansion and growth. A business loan may be suitable for your business if you need funding for things such as a business acquisition, start-up costs, capital investment, property acquisition or development, or refinancing other lending.

 

Business loans can help with managing cash flow by providing a lump sum of cash that can be used to cover expenses. They can also help to finance business growth by providing the funds necessary to invest in new opportunities. 

What is difference between Unsecured and Secured Business Loans?

There are a number of different business loan options available, so it’s important to research the best option for your business needs, this also goes for secured and unsecured. The main difference between a secured loan and an unsecured loan is whether an asset such as commercial or residential property, or other business assets are used as security against your loan. For corporate borrowers, director guarantees may be required.

 

If you choose to offer security for your business loan, you will typically pay a lower interest rate than if you choose the unsecured business loan option. Bear in mind that the interest rate is lower because they are secured against a pre-agreed asset, which can be recovered against if you are unable to repay the loan.

Secured Business Loan

A secured loan requires personal guarantee or an asset to be provided as security. This may be property, inventory, accounts receivables or other assets. This security covers the business loan amount if you're unable to pay it back.
  • Collateral
    Collateral required depending on loan amount
  • Interest Rate
    Usually lower between 2% to 15%
  • Loan Amount
    Between $5,000 - $1 Million +
    Usually higher depending on secured collateral
  • Loan Term
    12 months - 30 years
  • Approval Time
    4 - 6 weeks
  • Suitability
    - Established Business over 6 months - 1 year
    - Strong Credit History
    - Business in need of renovations, expansion, stock
  • Drawbacks
    - If payments aren't met collateral is taken
    - Longer turnaround time
    - Additional hidden fees
  • Requirements
    - Asset Evaluation
    - Credit history & ID Verification
    - Cashflow Statements
    - Tax Returns
    - Additional personal and business financials

Unsecured Business Loan

An unsecured loan doesn’t require physical assets (such as property, vehicles or inventory) as security. Instead, your lender will often look at the strength and cash flow of your business as security.
  • Collateral
    No Collateral required
  • Interest Rate
    Usually higher between 5% to 35%
  • Loan Amount
    Between $5,000 - $500,000+
    funding amount depends on business cashflow
  • Loan Term
    3 months - 18 months
  • Approval Time
    Fast approval process
    within 24hrs
  • Suitability
    - Fast access to funding
    - Less paperwork and assessments required
    - Freedom to use your funds how you see fit for your business
  • Drawbacks
    - Higher rates
    - Shorter terms
    - Potentially additional fees depending on lender
  • Requirements
    - Annual Turnover
    - Credit history & ID Verification
    - Cashflow Statements
    - Additional documents may be required

To conclude, Secured Loans offer lower rates and longer terms. However, the approval process is longer with various in-depth documentation required as assets are used as security for the loan. On the other hand, Unsecured loans use cashflow as security, instead of physical assets. The approval process is quick, as no security is required. However, the interest rate is higher than secured loans.

What are other Business and General Loan Options?

There are multiple types of Business and Personal loans available in Australia, with so many loan options, it’s important to know your business needs and align it with the most suitable loan type. The options vary depending on your business needs, the length of the loan and the terms of the loan.

 

Here is a quick guide to help you differentiate between some common types of general loans and business loans:

Morgage Loan

A mortgage usually has a lower interest rate, but refinancing it will take longer and require more documentation than a business loan. 

Personal Loan

While it’s not recommended to mix a personal loan for business purposes, this is sometimes an option for a new business looking for extra cashflow.

Business Loan

Depending on weather you are looking for Long-Term or Short-Term Loans you can choose to pay in regular installments over a set period of times.

Merchant Cash Advance

A merchant cash advance is a type of business financing that is particularly well suited to a small business that accepts debit and credit card payments from customers.

Line of Credit

Line of credit that is usually connected to your business transaction account, which you may use when you need to make a purchase but do not have enough money in your account. 

Overdraft

An overdraft is an approved extra amount of funds attached to your business transaction account, which you can access whenever you spend more than the balance in your account. 

Let’s take a look at the these loan types in detail

The most well-known loan that most people are aware of is a mortgage, we have mentioned this is a loan type as many business owners may look into drawing funds for their existing mortgage to start their business.

 

Many small business owners use their mortgages to fund new ventures and increase cash flow, but this is not desirable as personal and business finances should be kept separate. A mortgage usually has a lower interest rate, but refinancing it will take longer and require more documentation than a business loan. 

 

If things go south and repayments are not met on time, your home may be at risk of being repossessed by the lender.

While it’s not recommended to mix a personal loan for business purposes, this is sometimes an option for a new business. However, the APR will be determined by the amount, the length, the charges, the risk and the base rates. And in the current climate will be increasing.

When deciding between personal and business loans, it’s important to consider your specific financial situation. In general, taking out a personal loan for short-term use is likely better than using your business account because it will be easier to repay (and will tend to have lower interest rates). However, if you need long-term financing or need more than seven percent APR on your personal loan (or less than four percent APR if you’re a small business), then a business loan would be best.

Long-Term Secured Loan

A long-term secured loan is the sort of business loan that first comes to mind. A long-term loan is a lump sum plus interest that you pay in regular installments over a set period of time. Long-term loans can last for as long as 30 years but are usually repaid over a period of 12 months or more. You can acquire long-term loans from both traditional banks and online lenders.

 

Short-Term Unsecured Loan

A short-term unsecured loan is a short-term loan that is repaid over a shorter period of time, usually 3 to 18 months. Businesses can get the money they need faster with a short-term loan, often within 24 hours. Because online lenders are more flexible than traditional banks, businesses may apply and receive approval faster.

 

A merchant cash advance is a type of business financing that is particularly well suited to a small business that accepts debit and credit card payments from customers. A lender gives the business a cash advance, which it then repays as a percentage of its customers’ debit and credit card payments using a card terminal.

 

Unlike a traditional loan, which often requires collateral and usually comes with fixed repayment terms, a merchant cash advance has no fixed repayment schedule. Instead, it operates like a line of credit, so the business only repays the advance if and when it receives new card payments from customers. As long as the business receives card payments, it must pay back a percentage of those card payments to the lender.

An overdraft is a line of credit that is usually connected to your business transaction account, which you may use when you need to make a purchase but do not have enough money in your account. You may spend as much as you want as long as the overdraft remains below the authorised limit. You repay what you can whenever you can – interest is only assessed on the money you use, not on the total amount of the overdraft facility. This sort of business funding is typically used to alleviate money flow pressure, by providing funds to cover expenses such as purchasing inventory and paying invoices and wages until you are compensated by your clients.

These tend to attract high-interest rates and can be withdrawn, unlike a loan which is for a fixed period.

 

An overdraft is an approved extra amount of funds (or ‘line of credit’) attached to your business transaction account, which you can access whenever you spend more than the balance in your account. You pay back what you can, when you can – as long as the overdraft stays under the approved limit. Interest is generally charged on the overdraft balance until it is fully repaid.

Other loan options

There are few other types of funding options for those wanting to grow a business

An expensive way to borrow money, only use if you can pay off monthly balance. It may take as little as a week to get a business credit card, depending on your circumstances, including how long you have been in business and your credit score. You may use business credit cards to purchase anything you want. As long as you pay the minimum amount due, you may vary your payments to accommodate your schedule. However, creditcard interest rates are much higher, and some businesses have difficulty when credit card payments aren’t paid on time or accrued interest isn’t repaid. 

A fully drawn advance loan is a type of term loan that gives the borrower money to purchase assets or make long-term investments. The borrower must repay the loan with principal and interest within a specified period. 

There are two types of finance lease:

 

  • Full payout – the assets is rented / leased to the customer for a fixed period (normally the useful life of the asset), the customer makes rental payments that cover the capital cost and interest at the end of the lease period the customer can either return the asset, continue to use it by making a peppercorn rental
 
  • Residual Value Lease – the assets is rented / leased to the customer for a fixed period (normally a period which is less than the useful life of the asset), the lessor (owner of the asset) predicts what the asset will be worth when the asset is returned to them. The customer (lessee) pays a rental which is the capital cost of the asset – predicted rv value plus interest. When the fixed term has ended the customer (lessee) has two choices, return the asset, extend the asset for a further fixed period normally at a reduced rental, in some case the lessee may be able to purchase the asset, but this can impact capital allowances.

With a RV lease when the asset is return additional charges may be applied to cover damage to the asset over and above fair wear and tear (eg motor vehicles)

Your business can purchase assets through a hire purchase agreement, in which the lender purchases the asset and then allows your business to utilize it in return for periodic payments. Once all payments and the final payment have been made, your business owns the asset.

A balloon payment is a popular choice when choosing or leasing equipment or transportation vehicles for a company. A balloon payment can be a good option for various reasons, although there are some drawbacks to think about as well. Because balloon payments keep monthly payments low and free up your cash flow, you may want to consider them. However, you’ll be left with a big payment at the end of your term, and you’ll also end up spending more interest.

Conclusion

Businesses that want quick funding without hassle can take advantage of Unsecured Business Loans. Business loans are preferable to general loans because you can keep your personal and business expenditures separate. A business loan also gives you the freedom to choose how you spend your money on your business rather than other leasing, equipment hire or restricted financing loans.

No Security Needed

No assets are required as collateral to apply for funding with a Capify Business Loan

Fast Approval

Connect your accounting software for a quick quote, have funds in your account within 24 hours

 

Minimal Documents

 All you need is ID verification and cashflow statements

Disclaimer: All content is for general information purposes only and is not intended to, nor does it, constitute legal, accounting, business or financial or any other professional advice or services. You should obtain advice from a qualified financial advisor before making any investment or financial decision.

Learn more about Business Loans

Are you still wanting to know more about business loans? What the benefits are and whether it’s right for you and your business, check out our blogs to find out more

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