A lease, also known as finance lease, allows you to use an asset (like a car, machinery or equipment) for an agreed period of time. The lender buys the asset at your request and it is rented to you over a fixed period of time (the term of the contract). Once the lease period ends, you return the vehicle or equipment and pay the residual value.
A hire purchase allows your business to buy assets over an agreed period of time. The lender buys the asset at your request and allow your business to use it in return for regular repayments. When all the repayments and final repayment is made, your business owns the asset.
A chattel mortgage (sometimes referred to as a goods loan) is the most popular type of business asset finance. With a chattel mortgage, your business buys and owns the asset from the beginning of the loan term and makes regular repayments for an agreed period of time until the loan is fully repaid.
Sometimes known as accounts receivable finance, this is a quick way to access cash to pay outstanding invoices. You can typically access up to 85% of the value of your approved unpaid invoices.
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.
Loans for business with security
A secured loan requires 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.
- allow you to borrow against your assets, e.g. property, inventory, accounts receivables
- generally involve a longer approval process, as there’s security to consider
- may require value assessments and additional proof and documentation of assets
- generally offer lower interest rates and higher borrowing amounts than an unsecured loan.
Loans for business without security
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.
- often use the strength of your cash flow as security, instead of physical assets
- are generally for smaller amounts
- may be assessed quickly, as no security is considered
- tend to have a higher interest rate than secured loans, as they’re deemed higher risk.
Business loan guarantors
If you don’t have an asset to provide as security for a business loan, you may be asked for a guarantor or directors guarantee. A guarantee allows lenders to recover any outstanding debts from the guarantor if you cannot make your repayments.
There are 2 types of guarantees:
First party guarantee: You guarantee the loan by providing security from an asset that you own, usually a property. This is the most common type of guarantee.
Third party guarantee: In some cases you’ll need someone else (a person online payday loans Hamilton or entity that is not you – the borrower) to guarantee your business loan. They’ll need to provide security from 1 of their assets.
If you can’t make your business loan repayments, the guarantor will be asked to pay them for you. In some cases, if the repayments aren’t being made, the guarantor may need to sell their nominated asset to cover the remaining debt, or offer further security.
To increase your borrowing power, many small business loans are secured by an asset – usually property. The amount of equity available in the property helps to determine how much you can borrow.