UNDERSTANDING THE DIFFERENCE BETWEEN SECURED AND UNSECURED LENDING : A GUIDE FOR SOUTH AFRICAN BUSINESSES BY GEDDES CAPITAL
UNDERSTANDING THE DIFFERENCE BETWEEN SECURED AND UNSECURED LENDING : A GUIDE FOR SOUTH AFRICAN BUSINESSES BY GEDDES CAPITAL
AS BUSINESSES AND SMES IN SOUTH AFRICA NAVIGATE THE COMPLEX LANDSCAPE OF FINANCING OPTIONS , THERE IS OFTEN CONFUSION SURROUNDING THE TERMS SECURED AND UNSECURED LENDING .
TO SHED LIGHT ON THIS TOPIC AND EMPOWER ENTREPRENEURS WITH KNOWLEDGE , GEDDES - SPECIALISTS IN SECURED BUSINESS LENDING - PROVIDES A COMPREHENSIVE GUIDE TO UNDERSTANDING THE KEY DIFFERENCES BETWEEN THESE TWO TYPES OF LENDING .
SECURED LENDING INVOLVES BORROWING MONEY THAT IS BACKED BY COLLATERAL , SUCH AS PROPERTY OR OTHER ASSETS INCLUDING VEHICLES , LISTED SHARES , ART OR GOLD COINS OR PLANT AND MACHINERY , WHICH CAN BE SEIZED BY THE LENDER IN THE EVENT OF DEFAULT .
CONVERSELY , UNSECURED LENDING DOES NOT REQUIRE COLLATERAL AND IS BASED SOLELY ON THE BORROWER ' S CREDITWORTHINESS . WHILE THIS CAN BE ADVANTAGEOUS FOR SMES AND STARTUPS WITHOUT SIGNIFICANT ASSETS , IT TYPICALLY COMES WITH HIGHER INTEREST RATES AND SHORTER REPAYMENT TERMS TO MITIGATE THE LENDER ' S RISK .
UNPACKING WHICH SITUATIONS A LENDER MIGHT PREFER SECURED LENDING OVER UNSECURED LENDING , FOUNDER AND CEO OF FINANCIAL SERVICES COMPANY GEDDES , BRENT GEDDES SAYS , “ UNSECURED IS QUICKER TO ACCESS AND POTENTIALLY HAS LESS RED TAPE TO PUT IN PLACE , BUT WILL BE MORE EXPENSIVE AND HAVE A BIGGER IMPACT ON CASH FLOWS OF THE BUSINESS TO PAY BACK THE LOAN ”.
HE GOES ON TO SAY , “ UNSECURED LOANS TEND TO HAVE TO BE PAID BACK IN MONTHS . THE IMPRESSION THAT THEY PROVIDE LONG TERM CASH FLOW FOR THE BUSINESS CAN BE QUESTIONED . A SECURED LOAN WILL TAKE A BIT LONGER TO PUT IN PLACE BUT CAN BE STRUCTURED TO MORE SUITABLY MATCH THE CASH FLOWS OF THE BUSINESS .” HOW DOES THE RISK ASSESSMENT DIFFER ?
UNSECURED LOANS MAINLY LOOK AT THE IMMEDIATE CASH FLOWS OF A BUSINESS FOR THE LENDER TO MAKE A DECISION , AS THEY NEED THE LOANS REPAID QUICKLY TO REDUCE THEIR RISK AS FAST AS POSSIBLE .
“ BORROWERS ARE ULTIMATELY LIABLE TO REPAY THE MONEY , BUT IN THE CASE OF UNSECURED LOANS , THE LENDER ONLY HAS RECOURSE TO GET THE MONEY BACK FROM THE BORROWER . IF THE BORROWER HAS OFFERED A FORM OF SECURITY , THE LENDER THEN HAS THE RECOURSE IN THE EVENT OF DEFAULT , TO USE THE VALUE OF THE ASSETS TO GET REPAID . THIS CAN BE A LENGTHY PROCESS , AND THE LAST ROAD A LENDER WANTS TO GO DOWN ”, SAYS GEDDES .