Last Updated on February 13, 2020

What you need to know about unsecured business loans

There are now more business finance options on the market than ever before. This is great news for the multiple small businesses that they help, but bad news for the business owner deciding on the right type of finance for them.

Reducing costs, maximising benefits, and minimising risk to the business are all things that need to be taken into consideration when finding a business finance option. A competitive unsecured business loan may be able to help achieve all of these goals.

If you’re ready to compare business loans, our free service lets you compare loans from over 70 lenders—both big and small.

Read on to find out how unsecured business loans work, pros and cons, and what to look out for in our comprehensive guide.

What is an unsecured business loan?

An unsecured business loan allows you to borrow money to cover any business-related finance need, without the need for collateral.

This is different from secured loans which require you to put up an asset as a guarantee against the loan. This asset is typically property, expensive machinery or a vehicle. If the borrower fails to repay the loan, the asset can be repossessed and sold by the lender to recover the costs of the loan.

Applications for unsecured loans are typically assessed based on business cash flow and the applicant’s creditworthiness. The financial health of the business and your personal credit score will have a more significant impact on whether the application is approved or denied. The lender needs to see real-time business data and your projected ability to repay the loan, with real profit forecasts.

Unsecured business loans are typically short-term. Depending on the lender, they are usually offered from 3 months up to 3 years. However, some unsecured business loan lenders do offer terms of up to 5 years.

Unsecured business loans are riskier to lenders as they cannot make a claim on any asset if the repayment schedule is not met. This typically means they attract higher interest rates with shorter loan terms than other finance options.

What can an unsecured business loan be used for?

Unsecured loans can be used to finance any business-related costs. A boost to your working capital can give you the flexibility to smooth your cash flow, purchase equipment, renovate, hire new staff, and more.

As long as it’s a legitimate business activity, an unsecured business loan can be used. So, once you’re approved, it’s up to you what you do with the capital.

Short-term examples

Manage cash flow – Short term cash flow challenges can put the pressure on your business, especially in quieter periods or times when you need to make unforeseen payments. An unsecured loan may help to tide you over the challenging times until more capital is available.

Refresh your inventory – An unsecured loan can help you to restock inventory to prepare for a busy season. Having access to working capital can also allow you to broaden your product range to attract more customers.

Bridge receivables – A business loan may be the answer to covering periods between funding rounds.

Long-term examples

Introduce a new product range – An unsecured business loan can fund purchases for a new product line. For example, a carpet store branching out into hardwood and tiles to bring in more trade.

Enter new markets – Targeted marketing campaigns can boost customer traffic by reaching new customers across new platforms.

Who is an unsecured business loan for?

This type of loan is beneficial for businesses that don’t own tangible high-value assets like property, or expensive equipment. Many small and medium-sized businesses in Australia run from a rented space with few pieces of equipment and lower value inventory, which can make it challenging to be approved for a secured loan.

  • Simple Application Process
  • No Security Required
  • Funds Available Fast
  • Builds Lender Trust
  • Assets Are Protected
  • Improved Credit History
  • Higher Credit Limit
  • High Interest Rates
  • Personal Guarantees
  • Difficult To Qualify For
  • Smaller Loan Amount
  • Shorter Loan Terms
  • Liability Requirements
  • Repayment Penalties

TIP: Make sure you fully understand the pricing of the loan, including any additional charges and interest rates.

Benefits of an unsecured loan

Fast and simple application process. Unsecured business loans are easy to apply for because no security is required, you don’t need to itemise your assets, and the lender does not have to value the collateral. The application process usually only takes a few minutes, and the turnaround time is often much quicker than that of a secured loan.

  1. No security required. This is arguably the main advantage of an unsecured business loan. If you don’t have high-value assets to secure a loan, you can still apply for the finance you need to improve or run your business.
  2. Quick access to the funds. Less paperwork is required for an unsecured loan, so there is less to evaluate, this typically means a much faster turnaround time. A straight-forward unsecured loan application can be approved in as little as 2 hours with same day turnarounds and settlements in 24-48 hours.
  3. Can help to build a relationship with your lender. Approval of an unsecured loan shows a high level of trust between you and the lender. It requires that the lender trust you and your business. Once you have paid it back, it can lead to an even higher level of confidence, easier access to finance, and potentially better terms.
  4. Your business assets are safe. If your business defaults on an unsecured business loan, the lender won’t be able to seize any of your personal or business assets like they would if you defaulted on a secured business loan. An exception to this is if you have provided a director’s guarantee as a part of the unsecured business loan. If this is the case, then your business assets will still be safe, but you will be personally financially liable for covering any default made by the business.
  5. It may improve your business credit score. Successfully paying off your unsecured loan will help to build your credit history, improve your business credit score and make it easier to obtain a loan in future.

Drawbacks of an unsecured loan

  1. Typically higher interest rates. Unsecured loans are higher risk for lenders, so the interest rates are often higher. You will likely pay more for an unsecured loan over the long term, but the overall amount could depend on the quality of your credit score.
  2. A personal guarantee may be required. This means you will be held personally responsible for the repayment of the loan if your business cannot meet the repayment schedule or defaults on the loan.
  3. Some businesses may find it challenging to qualify for an unsecured loan. The high-risk nature of these loans can mean lenders are stricter with their lending criteria. People with a poor credit history (personal or business), or no credit history at all, may find that they don’t qualify for funding.
  4. Loan amounts can be smaller. Some lenders will have a cap on the amount they are willing to offer with an unsecured loan to mitigate risk.
  5. The term of the loan is often shorter. Again, to reduce risk, some lenders keep a tighter rein over unsecured loans and only allow shorter-term loans.
  6. Repayment fees may apply. Early repayment fees or a minimum ‘stay-in’ period may apply to dissuade people from paying back their loans too quickly and the lender losing out on interest.

Common eligibility criteria

  • Australian business
  • Annual turnover of $75k+
  • Trading for 3 months+
  • Run a profitable business
  • Be creditworthy

Applying for an unsecured business loan

In order to approve unsecured loan applications, lenders need to be sure that your business will be able to meet any required loan repayments, whether this is weekly, fortnightly or monthly.

The lender will need to assess the stability and risk of your business; they often require a combination of the below to be submitted with the application to do this.

  • Business financial statements
  • Business tax returns & statements
  • Business bank account statements

Common reasons unsecured loan applications are declined

  • Poor credit score
  • Outstanding Debt
  • Young Business
  • Weakening Industry
  • Seasonal Business
  • Inconsistent Revenue

A range of non-bank unsecured business loan lenders operate in Australia. We work with over 70 of these lenders, both big and small, to provide a free and simple way to compare their terms and rates. You can get approval in as little as 24 hours, apply for any amount between 5K and 20M, and receive funds straight into your account once approved.

Our goal is to ensure that you find the right financing solution for your business. Click here if you’re ready to compare business loans today.

Still have questions? Let’s talk

Confused? Not sure if this applies to your situation? Phone us on 1300 190 429 for some free, no obligation advice.

Or want to compare business loans now?

About the Author

Eleanor Baxter
Eleanor Baxter

Eleanor Baxter has extensive experience writing for the Australian financial and healthcare sectors. Her portfolio includes guides that cover all aspects of both physical and financial health and wellbeing. Coming from a background in communications, fitness, and psychology, she has found a passion for demystifying personal and business finance for the everyday reader. When not at her writing desk, you’ll find Ellie walking her two dogs or practising an asana.

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