Guide
Secured and unsecured finance
Whether a facility is secured changes what it costs you, how long it takes and what happens if things go wrong. It is worth understanding before you choose.
5 min read
What security means
Security is an asset the lender can look to if the facility is not repaid. In business lending it is commonly the equipment or vehicle being financed, commercial property, or a general security interest over business assets.
A personal guarantee is a related but different thing. It is a promise by a director to meet the obligation personally, and it can be required whether or not there is other security. It is common in Australian business lending and should never be signed without understanding what it commits you to.
How they differ in practice
Secured facilities generally take longer to arrange, because the asset has to be identified and valued and the security formally established. Property security in particular brings legal work and a valuation, which takes time no matter how organised everyone is.
Unsecured facilities are usually quicker to arrange and lean much more heavily on trading performance and credit history, since there is no asset to fall back on. Lenders price for that difference.
Which tends to suit which situation
If you are buying an identifiable asset, secured finance against that asset is the usual route and is often available where an unsecured facility would be harder. The purchase creates the security.
If the need is operating cash with no asset attached, an unsecured facility or a receivables-based one such as invoice finance is more likely to be the shape of the answer.
- Buying equipment or a vehicle: usually secured by the asset itself
- Buying or refinancing premises: secured by the property
- Covering a short cash flow gap: often unsecured, or against receivables
- A standby limit for unpredictable needs: either, depending on position
Questions worth asking before you sign
Whichever route you take, these are the things to be clear on. A specialist should be able to answer all of them without hesitation.
- What exactly is being taken as security, and over what
- Is a personal guarantee required, and from whom
- What happens if a payment is missed
- What are the terms for early repayment
- Are there fees to establish or maintain the facility
- What would trigger a review of the facility
The short version
- Security is an asset the lender can look to; a personal guarantee is separate
- Secured facilities generally take longer to arrange
- Unsecured facilities lean harder on trading history and credit
- Buying an asset usually creates its own security
- Never sign a personal guarantee without understanding it
This is general information, not advice. It does not take account of your objectives, financial situation or needs, and it is not financial, credit, tax or legal advice. Ur Business Finance is a matching service, not a lender. Whether finance is available, and on what terms, is decided by the lender.
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