Secured vs Unsecured Debt Financing

A secured debt is a debt on which payment is guaranteed by an asset or lien. This means that a secured debt has collateral; if the debtordoes not repay the debt in due course, the creditor has the legal right to take possession of the collateral and resell it to recover losses. In case of bankruptcy, the creditor is considered a secured creditor, which means the creditor receives proceeds from the sale of the collateral to satisfy the debt. If the collateral is insufficient, all secured creditors must have their debts satisfied before any unsecured creditors receive any funds.Growing a business is part of every business owner’s plans. The ways of funding the expansion are many and most prefer to do it by plowing back their profits or through equity financing. Increasingly debt financing is seen as a feasible way of financing the next phase of the company’s growth.

Compared to equity financing which needs a period of up to 12 months if you are listing your company for a first time, debt financing is a way to gain quick access to funds. Other reasons why equity financing is ruled out could be due to stringent criteria required on companies to be listed and directors’ reluctance to dilute their shareholdings.

Companies can choose between secured and unsecured debt financing. Secured overdrafts would require the companies to pledge collateral in the form of cash or property. Unsecured overdrafts do not require any collateral but the credit line granted out is subjected to yearly reviews. Both facilities would require the personal guarantees of all directors. Business overdraft facilities serve as a source of funds that your company can tap into during emergencies. The interest rates are much lower than drawing down on your personal credit cards.

Secured overdrafts typically have a lower interest rate, higher loan quantum as well as a potentially shorter loan tenor of up to three months. You can pledge assets such as cash, property, stocks etc. If property is being used as collateral, bankers typically look at the location of the property, whether it is fully paid up as well as the current market value. Depending on the type of collateral pledged, the loan quantum granted out can be slightly lower or much higher than the market value of your collateral.

Alternatively, consider the unsecured business installment loan which offers you interest rates that are comparable or even lower than what your local business financing assistance bureau is offering. In addition the loan quantum granted out by financial institutions is four times more. The loan application process of most financial institutions today is fast and hassle-free. The loan can be approved as fast as 24 hours and the funds are available for your usage immediately.

To be eligible for these credit facilities, companies have to be in operations for at least three years. The company directors must have at least two years of relevant experiences and at least one director is aged between 25 and 60 years of age at the point of application. Lastly, the business must not be involved in certain high risk industries such as arm manufacturers and casinos. To learn how debt financing can help you to grow your business, speak to your banker today.