Unsecured Business Loans

What is an unsecured business loan?

An unsecured business loan is a form of short-term debt finance for businesses.

As the name indicates, you don’t have to provide collateral for the loan, which makes it accessible to less established businesses without valuable assets to offer as security.

However, you may be asked to provide a personal guarantee for an unsecured business loan – this could mean that your personal assets, such as your home, are at risk if your business defaults on its obligations.

Typically, an unsecured loan for business use will be offered for a term of 3 – 12 months.

Depending on your risk profile and your capacity to service your repayments, you may be able to borrow between $5,000 and $400,000.

Who uses unsecured business loan?

Unsecured business loans are one of the top choices for Australian SMEs.

They’re popular with businesses that have been trading for more than six months but do not meet the complex qualification criteria for a bank loan.

Larger, more established businesses often opt for unsecured business loans too, because they offer far more speed and flexibility than a traditional bank loan.

Opportunities to grow your business may arise unexpectedly and often require swift action – and fast finance.

Other business owners use unsecured business loans as a way to build up their business credit rating, making regular, on-time repayments to prove their reliability and build trust with a lender.

This can be an important step in preparing for more substantial borrowing down the track.

What’s the purpose of an unsecured business loan?

An unsecured loan is an all-purpose business loan that you can use for any legitimate business purpose.

Here are just some of the ways you could use a business loan:

Note that an unsecured business loan is not suitable for major or long-term investments, such as buying property – not only is it likely to be more costly than a long-term finance facility like a mortgage, you also run the risk that you will not be able to refinance your debt at the end of your loan term.

How much does an unsecured business loan cost?

Unsecured business finance is of course more risky for the lender than a secured loan, so the cost is typically higher. The actual rate you are offered will depend on many factors, including how much you want to borrow, the term of the loan, and the profile of your business – as well as on external factors such as the Reserve Bank of Australia’s cash rate.

Rather than advertising an interest rate, providers of unsecured business loans often use a factor rate. This is expressed as a multiple of the loan, rather than a percentage – for example, 1.15 or 1.3. Have a look at the following example.

Unlike an interest rate, which is calculated monthly on your reducing loan balance, a factor rate is a fixed amount which is calculated upfront on the full balance when you take out your loan.

This amount will then be added to your loan principal, and you will pay regular instalments until you have repaid the total payback amount (principal and interest).

Some lenders will allow you to set a repayment schedule that matches your income forecasts, while others will require monthly repayments, so be sure to explore your options if you need flexibility.

It’s important to note that unsecured loans can be expensive compared to secured loans – especially if you are considered to be a high-risk customer – and business owners often misunderstand factor rates. Make sure you are aware of all the costs associated with the loan – including any extra fees such as set up costs, transaction charges and early repayment penalties.

Where to get an unsecured business loan

Australia has thriving alternative finance market, and there are scores of lenders competing to offer loans to SMEs.

You can search for lenders online or check out some of the lenders below.

How to choose an unsecured business loan provider

With so many lenders to choose from, it’s hard to know where to start.

Here’s several factors you need to consider:

• There’s more to choosing an unsecured business loan than comparing rates. You also need to be find out if there are any other costs (discussed above) so you can establish the full, comparable cost.
• Loan terms and conditions can vary widely, too, and some lenders will impose restrictive conditions (such as preventing you from offering credit terms to your customers, which could be a major competitive disadvantage in some industry sectors). Be sure to research the product carefully, read the fine print and make sure you understand exactly what you’re committing to before applying.
• Is the lender reputable? Look for social proof, such as personal or online recommendations and reviews (ideally you should seek these through review sites and social networks, rather than relying on testimonials on the lenders’ website, which can’t be verified).

• Unlike Australia’s big banks, fintech lenders are not yet tightly regulated. This means that you need to be wary. Businesses can be the target of loan scams and disreputable lenders just like individuals, so it’s a good idea to check sources like ASIC’s list of unlicensed companies and follow the advice on their Money Smart website before making a decision.
• Each lender will have their own risk appetite, lending criteria and preferences. If you can find a lender that specialises in lending to companies within your industry or following your business model, you may find it easier to access finance, or be able to secure a more favourable rate.
• There are also lenders who will finance businesses with poor credit ratings or bad credit – for an additional cost.
• With so many different lenders and unsecured business loan products to choose from, it can be very difficult to understand and compare all your options. You can make this easier by engaging the services of a reputable business loan broker. They will be able to help you find the most appropriate lender, choose a suitable loan product and identify any discounts or special offers that are available.

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If you can find a lender that specialises in lending to companies within your industry or following your business model, you may find it easier to access finance, or be able to secure a more favourable rate.

Before applying for an unsecured business loan

Before applying for any form of business finance, including an unsecured business loan, it’s vital that you prepare a business case for borrowing.

Loan repayments can put a real strain on your working capital, and you need to be sure that the loan will benefit your business and generate enough additional profits to cover those repayments.

The top reasons SMEs fail in Australia are cash flow problems and growing too fast.

An unsecured business loan could give you the working capital boost you need to meet your financial obligations even when business is quiet, or the funds you need to grab an exciting growth opportunity – but it could also pull you into debt you can’t afford.

Preparing a business case for your loan – including realistic projections of the additional profits (not turnover) you can expect to generate from it – will help you make prudent, well-informed decisions. In many cases, it may be better to delay expenditure until you have cash reserves to cover it.

As well as being vital for your decision process, you may need to provide a business case as part of your loan application.

It’s a good idea to speak to your independent professional financial advisor, too, before applying, to explore whether the timing is right – and whether an unsecured business loan is the right type of finance for your needs.