Is a Small Business Loan Secured or Unsecured?

A small business loan can be either. Secured means the lender holds a claim over a specific asset, or over all of the business's assets, and can take and sell them if the loan is not repaid. Unsecured means the lender relies on the business's cash flow, credit history and, almost always, a director's personal promise to pay. The same lender often offers both, the same business may hold one of each, and the label decides the rate, the amount, the paperwork and what is at risk.

This guide answers the question in four parts: how to tell which kind of loan you have or are being offered, what lenders accept as security, why a personal guarantee is something else, and when a lender will insist on security. For help choosing between the two, see Secured vs unsecured business loans: what's right for your business.

How to Tell Which One You Have

The loan contract says. A secured loan carries a security clause, a mortgage or a general security agreement naming the asset or the class of assets the lender can claim, and the lender registers that interest on the Personal Property Securities Register for anything that is not land, or on the land title for property. An unsecured loan has no such clause; what it usually has instead is a personal guarantee from the directors. A PPSR search against the business as grantor, by ABN or ACN, shows the security interests registered against it, which is also how a prospective lender checks whether an asset offered as security is already spoken for.

Product names are a rough guide but not a reliable one. Equipment finance, chattel mortgages, hire purchase and commercial property loans are secured by the asset they buy. Bank term loans and overdrafts are often secured by property. Online business loans and most short-term facilities are unsecured. A line of credit or overdraft can be either, depending on the lender and the limit.

What Counts as Security

Lenders accept assets they can value and sell. Commercial and residential property, including a director's home, is usually the most common and usually attracts the best rates. Vehicles, plant and equipment are next, usually as security for the finance that buys them. Some lenders take receivables or inventory, generally through a general security agreement over all present and future assets of the business rather than a claim on one item. Cash deposits and term deposits can also secure a facility. The asset's value, how easily it can be sold and how quickly it loses value all shape how much a lender will advance against it.

Why a Personal Guarantee Is Not Security Over an Asset

Most lenders ask the directors of a company to give a personal guarantee for its loan, secured or not, and letters of offer often list the guarantee under the heading of security. It is not a claim on a particular asset. A personal guarantee makes the director personally liable for whatever the company does not pay, and it does not usually earn a rate discount. An unsecured loan with a personal guarantee is still an unsecured loan, which is why it is priced as one. The distinction matters at the point of signing: security gives the lender first call on a named asset, while a personal guarantee makes the guarantor liable for whatever is still owed, on a secured loan as well as an unsecured one, because a shortfall after the asset is sold is still a debt.

When Lenders Insist on Security

Security is asked for when the lender's risk is high relative to what it can see. Larger amounts and longer terms push a loan towards secured territory, as do a short trading history, a thin credit file, an industry the lender prices as risky, or a purpose the lender cannot verify. A business buying an asset is usually offered finance secured by that asset as a matter of course, because it is the cheapest way to fund it. A business with strong cash flow, clean credit files and a modest amount to borrow will often be offered an unsecured loan without being asked, at a higher rate for the convenience.

Business loans sit outside the National Credit Code, so each lender sets its own credit criteria and none is required to quote a comparison rate; the decision guide linked above covers how to compare offers on total cost.

The Short Version

Secured loans cost less, take longer and put a named asset at risk, with the guarantor usually standing behind any shortfall. Unsecured loans cost more, settle faster and rest on the guarantor alone. Which one a business ends up with depends on what it is borrowing for, how much, and what the lender can see. A broker who works across both can say quickly which lenders will offer what; Emu Money's finance specialists compare options from 50+ lenders. Complete the get started form and someone will be in touch.

Subject to lender approval, terms, and conditions apply.