Unsecured Business Loans Australia
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What is an unsecured business loan?
An unsecured business loan is a type of finance that allows a business to borrow funds up to $500,000 without providing collateral (security). The increased risk to the lender from lack of security often means unsecured business loans are offered for shorter terms and with higher interest rates compared to longer-term secured business loans.
Unsecured business loans are often attractive for small businesses owners as they mean being able to access cash without risking your personal or business assets.
Instead of collateral, unsecured finance is supported by the borrower’s reputation and the current cash flow of a business. But otherwise, they work in a similar way to secured business loans like chattel mortgages and business car loans.
Benefits of an unsecured business loan
- Fast application and approval
Applying for an unsecured business loan is usually faster than secured business finance. You won't need to provide information to the lender about an asset that is being used as security for the loan. Instead, you can simply give the lender access to your business financials to demonstrate you're eligible.
- More flexibility
An unsecured business loan can be used for any business purpose. Or you could use the funds to cover multiple costs. For example, multiple purchases as part of the same project or business expansion. With a secured loan, the loan is generally used to purchase a specific asset.
- Your assets won't be tied up
It won't be necessary to use business or specific personal assets (e.g. your family home) to secure the loan. This can reduce risk and means you won't be restricted in what you do with your assets in future (e.g. sell them).
Unsecured business loan interest rates
The lowest interest rates on secured business loans in Australia start from around 10.00% p.a.
This is higher than the rates typically available on secured business loans.
Lenders charge higher rates on unsecured business finance because there is no collateral provided by the business for the loan. This increases risk for the lender if for any reason the borrower can't repay the loan.
The interest rate you're offered on an unsecured business loan will be personalised to you based on your application.
How unsecured business loans work
Unsecured business loans in Australia offer fast access to cash without requiring the borrower to put down an asset as security. Here’s what’s on offer:
- Borrow from $5,000 to $1million
- Terms from one month to five years
- Simple application and approval
- Fixed or variable interest rates
- The interest rate will be tailored to you
- Higher interest rates and fees than secured finance
- May require a personal guarantee from a business director
Who is eligible for an unsecured business loan?
To be eligible for an unsecured business loan you generally need to meet these criteria:
- Own a business and have an ABN (including sole traders and self-employed individuals)
- Business must be GST-registered
- Australian citizen or permanent resident
- Minimum business-operating time of six months
- Can provide business bank statements
If you're approved for an unsecured business loan...
- A lender will provide you with access to funds
- You won't have to provide collateral as security on the loan
- You will have immediate ownership of anything purchased (unlike a finance lease)
- You will make regular repayments to the lender for a fixed period of time
It's a good idea to consider how repayments will align with how you plan to use your funds.
Typically, repayments will be daily or weekly to fit in better with your business cash flow. According to data provided by lender Prospa, 33% of businesses make daily repayments, and the remaining 67% opt for weekly repayments.
Best ways to use an unsecured business loan
If you qualify for an unsecured business loan with a lender, you can use the finance for more or less anything related to your business.
According to Money.com.au business lender data, the most common loan purposes are accessing working capital/smoothing over cash flow (50%); Purchasing stock and inventory (25%) and purchasing equipment (25%).
Here are just some of the other ways you could use the funds:
- Upgrade technology to improve efficiency, upgrade payment options or enhance your customer service.
- Business continuity and security
- Purchase another business to expand your operation
- Access funds to buy out a business partner
- Fitting out a new premises
- Hire and train staff for business expansion
- Develop and implement a new marketing strategy
- Establish an online presence to attract new customers
- Rebrand your business
- Renovate or upgrade your premises
- Cover regular expenses such as tax debt, lease costs and insurance, where there is a timing issue between income and expenditure
Unsecured business loans for SMEs
As there is no collateral required on an unsecured business loan, they can be used by small businesses that don't have valuable assets to offer as security.
This is important as the vast majority (around 98%) of business in Australia are small businesses.
Unsecured business loans also allow faster access to cash than some other forms of finance. This makes them attractive to smaller businesses who want a fast approval process to enable them to move quickly to capitalise on growth opportunities.
Unsecured business loan borrowing amounts
Depending on your risk profile and your capacity to service your repayments, you may be able to borrow between $5,000 and $500,000. You can try our business loan calculator to estimate your loan repayments based on different loan amounts.
Lenders generally consider unsecured business loans to be riskier. This means you may not be able to borrow as much as you would with a secured loan.
As a rule of thumb, most lenders will consider a 12-month unsecured business loan equal to your monthly earnings. For example, if your business earns $30,000 per month, you can generally borrow $30,000 on a 12-month term.
How to apply for an unsecured business loan
Lenders will applications based on the monthly revenue of the business and the intended use for the loan.
In addition, each lender will have its own approval criteria, such as:
- Minimum credit rating (there are bad credit business loans available if your credit is an issue)
- Minimum and maximum loan amounts
- A personal guarantee by the director of the company may be required.
The process may also be different depending on the loan amount.
If you are borrowing less than $100,000
If the unsecured business loan is for less than $100,000, you can generally apply online with specialist business lenders, including those who provide loans designed specifically for small businesses.
The approval process will be fairly simple. You’ll need to provide:
- Proof of identity
- Proof of ABN and GST registration
- An acceptable credit rating (the lender will do credit check)
- Business bank statements
- Trust Deed if the business is held in a trust
- Australian Tax Office (ATO) Portal access.
If you can’t provide standard business documents with your application, you could consider a low doc business loan.
If you are borrowing more than $100,000
If you wish to borrow more than $100,000, your lender will require additional documentation to assess your loan application. That means as well as the documents listed above, you’ll need to provide:
- Financial records (provided by your accountant)
- Profit and loss statements
- Business balance sheet
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Unsecured business loan frequently asked questions
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What is collateral on a business loan?
Unsecured business loans do not require collateral, which is why they are referred to as ‘unsecured’. A secured business loan uses collateral — an asset or something of value owned by the business — as security on the loan.
Generally, if a borrower fails to meet their loan repayments, the lender will sell the collateral to recover any missing funds. Collateral used as security on a loan could include:
Your home A vehicle Your personal savings Business inventory
Will I need to put down a deposit?
No, but this will vary from lender to lender. A deposit is essentially a type of up-front collateral, and while a deposit generally won’t be required by a lender, it can help reduce your monthly repayments and potentially assist you in getting a better interest rate.
Can I get an unsecured business loan if I have bad credit?
Yes, you can get an unsecured business loan if you have bad credit. Generally speaking, a lender will be looking to assess the strength of your business, not you personally.
What are the alternatives to unsecured business loans?
If you need finance for your business, an unsecured loan is just one option.
Other ways of securing funds include:
For large investments in an asset for your business, there are various forms of secured asset finance available.
Can I repay my loan early?
Yes, most lenders in Australia will allow you to repay an unsecured business loan early. However, it’s important to check with the specific lender to ensure there aren’t any early repayment charges or penalties if you choose to do so.
What interest rate can I expect to pay on an unsecured business loan?
Interest rates will typically be higher for an unsecured business loan than other forms of business finance. The actual rate applied will depend on the strength of your current business cash flow and ability to repay the loan.
What type of fees can I expect to pay?
Fees will usually be higher on an unsecured business loan than on a secured loan, as there is a higher risk for the lender. Each lender will have different rates and fees, which is why it’s important to calculate the APR (annual percentage rate), as well as the fees, on a loan offer to see how much you will actually pay.
What is a personal guarantee?
A personal guarantee is a legal commitment by a person or group to cover any outstanding loan amounts should the borrower default and fail to meet their payments. Personal guarantees are unsecured, which means they aren’t tied to specific assets you own. They represent a legal obligation to repay an agreed amount. There are several types of personal guarantees:
- An unlimited personal guarantee is a promise to cover the entire loan cost should the business be unable to pay the loan. This is the riskiest option for borrowers and the least risky for lenders.
- A limited personal guarantee involves the lender setting a figure of how much you’d owe in the event of a default or business failure.
- A several guarantee is similar to a limited personal guarantee, where a number of business owners offer personal guarantees for a fixed percentage of the loan amount.
- A joint and several guarantee involves each guarantor responsible for paying off the full amount of the loan should the others be financially incapable.
Written by
Loans Expert
Shaun McGowan
Reviewed by
Editor
Sean Callery
