Types of Business Loans: From Unsecured to Secured: Which Is Right For You?

Securing the right funding can make all the difference to your business. Whether you want to expand or smooth out cash flow bumps, choosing the right business loan can make all the difference.

But with so many types of business loans available, how do you know which one is right for your needs? Let’s take a closer look at the different types of business loans in Australia.

What Are Business Loans?

What are business loans used for? Business loans are a form of business financing that is typically used for business-related expenses.

When you apply for a business loan, you’re essentially borrowing funds from a lender, and in return, you agree to pay back the amount borrowed, usually with interest, over a specified period.

There are different types of loans in Australia available to eligible entrepreneurs, but the most common are secured and unsecured business loans.

Secured Business Loans

A secured business loan is a type of loan where the borrower offers an asset as collateral. This could be property, equipment, or any other valuable assets owned by the business. Borrowers who default on their loans can be forced to forfeit their collateral.

Benefits of Secured Loans

1. Lower Interest Rates: Lenders often charge lower interest rates on secured loans.
2. Larger Loan Amounts: If you need a significant amount of capital for business expansion or large projects, secured loans tend to offer higher loan limits.
3. Longer Repayment Terms: Secured loans often come with longer repayment terms, allowing businesses to repay the loan over a more extended period, easing cash flow pressure.

Secured loans are ideal for businesses that have valuable assets they can use as collateral. If you need a large amount of capital for significant investments, like purchasing machinery, real estate, or expanding your premises, a secured loan could be a good choice.

Unsecured Business Loans

Unlike secured financing, an unsecured business loan does not require any collateral. Instead, lenders rely on factors like the borrower’s creditworthiness, the financial health of the business, and the business’s revenue to determine eligibility and the loan amount.

Benefits of Unsecured Loans

1. No Collateral Required: Unlike a secured loan, an unsecured loan does not involve any risk to your business.
2. Faster Application and Approval Process: Since unsecured loans do not involve the need for collateral, the application and approval process is typically quicker than secured loans. 
3. Flexibility: Unsecured loans tend to offer more flexibility in terms of what the funds can be used for, whether it’s purchasing inventory, managing day-to-day operations, or covering unexpected costs.

If your business doesn’t have assets to pledge, or you don’t want to risk your valuable equipment or property, an unsecured loan might be a suitable option. These loans are often best for businesses seeking smaller amounts of capital for short-term needs.

Other Types of Business Loans Available in Australia

In addition to secured and unsecured business loans, there are other types of loans for business available in Australia that cater to specific needs:

Small Business Loans

Small business loans in Australia are designed specifically for businesses that are starting out or are in the early stages of growth. These loans often have lower business loan requirements than traditional loans, and some may even be government-backed, making them more accessible to small business owners. 

Here are the common uses for these types of loans:

• Operational costs: Day-to-day expenses to run the business, including rent, utilities, and salaries.
• Business expansion: Opening new locations or increasing production capacity.
• Purchasing equipment or inventory: Investing in essential tools, machinery, or stock to meet demand.

Lines of Credit

A business line of credit is a flexible form of financing that allows businesses to borrow up to a certain limit and only pay interest on the amount used. The following are some common uses for a business line of credit:

• Managing cash flow: Bridging gaps between income and expenses, particularly during slow periods.
• Purchasing inventory: Stocking up on goods when demand spikes.
• Covering short-term expenses: Meeting operational costs or paying employees during cash flow challenges.

Lines of credit provide flexibility, allowing businesses to address immediate needs without the burden of rigid loan terms or large upfront payments.

Equipment Financing Loans

For businesses that need equipment but don’t have the upfront capital, equipment financing loans allow you to borrow money specifically for purchasing machinery, vehicles, or other essential business tools. Key benefits of equipment financing loans include:

• Dedicated funding for equipment: Ensuring that businesses can purchase what they need without compromising other parts of the business.
• Collateral-backed loans: Since the equipment itself serves as collateral, these loans often come with lower interest rates compared to unsecured loans.
• Flexible repayment terms: Repayment terms are often aligned with the useful life of the equipment, making it easier to manage payments.

This type of financing is ideal for businesses looking to acquire large assets like machinery, computers, or vehicles.

Invoice Financing

Invoice financing or debtor finance is a type of loan where businesses borrow against their outstanding invoices. This is useful for businesses that face delays in receiving payments from customers but need cash flow to continue operations. There are two main forms of invoice financing:

1. Invoice factoring: The business sells its outstanding invoices to a lender at a discounted rate in exchange for immediate cash. The lender then collects the payment directly from the business’s customers.
2. Invoice discounting: The business retains control over collecting payments from its customers, but borrows against the value of its outstanding invoices.

Invoice financing can be a great solution for businesses that need quick access to cash and have reliable, invoiced customers.

How to Apply for Business Loans in Australia

Securing a business loan is crucial for the growth of your enterprise, whether you’re starting out or expanding. 

Step 1: Choose Loan Type and Amount

Before applying, decide which type of business loan suits your needs—secured or unsecured, small business loans, or lines of credit. Identify your financial needs and how you’ll use them.

Step 2: Check Your Business’s Financial Health

Ensure your financial records are in order. Lenders will require documents like cashflow statements, balance sheets, and cash flow projections to assess your financial stability.

Step 3: Understand the Loan Requirements

Each lender has specific requirements, such as a good credit score, minimum time in business, revenue thresholds, and collateral (for secured loans). Prepare a solid business plan to demonstrate how you will use the funds.

Step 4: Research Lenders

Explore different lenders, including banks, non-bank lenders, government-backed loans, and online lenders. With the help of a seasoned business finance broker, you can compare interest rates, fees, and loan terms to find the best fit for your business.

Step 5: Submit Your Loan Application

Once you’ve selected a lender, complete the application by submitting your business details, financial records, and a loan purpose statement. Some lenders may conduct a credit check at this stage.

Step 6: Wait for Approval

After submission, lenders will review your application. Approval can take a few days to a few weeks, depending on the lender.

Step 7: Review the Loan Terms

Carefully read the loan agreement, checking the interest rates, length repayment terms, and any fees. If everything looks good, sign the agreement.

Step 8: Access Your Funds

Once approved, the funds will be disbursed to your account, and you can start using them as needed, whether for expansion, inventory, or equipment.

Step 9: Repay the Loan

Follow the repayment schedule, ensuring you make timely payments to avoid penalties and protect your credit score.

Discover the Right Loan for You

If you’re unsure which loan option is best for your business or need guidance throughout the application process, Cabbage Capital is here to help. With our experience as a business finance broker, we can help you secure the right funding tailored to your needs.

Contact Cabbage Capital today to schedule a no-obligation consultation, or you can reach us at +61 418 574 655.