Secured business loans

How secured business loans work

A secured business loan uses an asset you own as collateral. The security gives the lender a legal claim over the asset, which it can sell to recover the debt if you default. In exchange for that lower risk, lenders offer lower rates, higher limits and more flexible terms.

Residential property is the most common security and typically secures the best rates. The lender has the property valued and lends up to a percentage of its value, the loan-to-value ratio (LVR): up to 80% is standard for residential property, so a $1 million property could support a loan of up to $800,000.

Commercial property can also be security, usually at 65% to 70% LVR. Equipment, vehicles and term deposits are other options, with borrowing capacity and rates depending on the asset type and condition.

Why choose a secured business loan?

A lower rate

Security is the largest single lever on price. CommBank's published starting rates show it: 7.29% p.a. variable for a secured BetterBusiness Loan against 12.84% p.a. for its unsecured online version. Over the life of a large loan, that difference is worth tens of thousands of dollars in interest.

A bigger limit

Unsecured business loans typically cap at $500,000; secured loans can reach $5 million or more depending on the value of the security.

A longer term

Property-secured loans can run for 25 years or more, which lowers the repayment and makes serviceability tests easier to pass. For established businesses with property equity, that makes secured lending the cheapest way to fund an expansion, an acquisition, premises or large equipment.

Types of security accepted

Australian business lenders accept a range of assets as security, each with different LVRs and rate implications:

• Residential property: Up to 80% LVR, best rates available, most widely accepted
• Commercial property: Up to 65% to 70% LVR, requires a specialist valuation, slightly higher rates. See commercial property loans.
• Equipment and vehicles: Up to 100% of asset value for new equipment, lower for used. See equipment finance.
• Term deposits: Up to 100% of deposit value, near-cash security gets excellent rates
• Share portfolios: Some lenders accept listed shares at 50% to 70% of portfolio value

You can also combine assets to increase the total you can borrow, such as a residential property as the main security and business equipment as additional security.

Risks to consider

You can lose the asset

The most significant risk is losing the secured asset if the business cannot meet the repayments. That matters most when the security is your family home, so get independent legal and financial advice before offering it.

Fewer legal protections

Business loans generally sit outside the National Credit Code: ASIC's position is that credit not predominantly for personal, domestic or household purposes is not regulated consumer credit, so responsible lending obligations do not apply. Read the loan and security documents carefully and understand your obligations before signing. A broker can explain the structure, and a lawyer should review the security documents.