Reading time: 3 minutes

There are two main types of loans; secured loans and unsecured loans. The term “taking security” means making a loan but requiring the borrower to offer up an asset as security. If the borrower doesn’t repay the loan then the lender can enforce the security; essentially claim the asset and have it sold to repay the debt.

Secured Loans

The classic secured loan is the traditional home loan. The bank lends the borrower the capital to purchase the house, but keeps the title deeds to the house until the loan is repaid in full. If, at any time during the term of the loan, the borrower fails to make repayments, the bank can sell the house in order to reclaim the debt.

In a business context, businesses often borrow money and secure the loan against the assets of the business, such as plant and equipment. Taking out a secured loan generally means that the borrower will have to pay a lower interest rate than they would if they’d taken out an unsecured loan. If the lender has more certainly that it will be repaid, the loan is less risky, and the bank can therefore offer a lower interest rate.

Unsecured Loans

Many small businesses don’t have significant assets and therefore can’t offer traditional security. One type of loan which small businesses without significant assets can consider is an invoice factoring agreement. The invoice factoring funder will provide upfront cash (usually up to 80% of the value of your outstanding invoices) and be repaid when your customers pay their invoices. This type of borrowing can solve a sort term cash flow issue for businesses which have a negative cash flow cycle.

If a business has a reasonable track record of success it may be able to borrow an unsecured revolving credit facility from a bank. This allows businesses to manage their cash flow more efficiently. A basic overdraft is another example of an unsecured loan that most banks are prepared to make to small businesses.

Finally, individuals make unsecured loans to friends and family on an everyday basis. It’s fair to say that this type of lending often causes more problems than some of the commercial loans discussed above!

Conclusion

There are many types of loans available to both businesses and individuals. In general, the more security you give, the safer the loan will be, and the less interest you will pay. It’s important that you work with a lawyer to review any non-standard loan agreement. If you’re lending money as either a business or an individual it’s crucial that you work with a lawyer to draft an enforceable loan agreement and security documents.

Webinars

COVID-19 Vaccines In The Workplace

Thursday 10 February | 11:00 - 11:45am

Online
Can you compel employees to have a COVID-19 vaccine? Understand your rights and responsibilities as an employer. Register today for our free webinar.
Register Now

Preventing Wage Underpayment In Your Franchise

Wednesday 16 February | 11:00 - 11:45am

Online
Learn how to identify and prevent wage underpayment in your franchise. Register today for our free webinar.
Register Now

How to Prevent and Manage Commercial Contract Disputes

Thursday 24 February | 11:00 - 11:45am

Online
Learn how to prevent and manage common commercial contract disputes. Register today for our free webinar.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

Our Awards

  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer