Shaun McGowan
What is an Unsecured Business Loan?
An unsecured business loan is a type of finance that allows a business to acquire funds from a lender quickly and without providing collateral. The increased risk to the lender from lack of security is often reflected by shorter terms and higher interest rates compared to longer-term secured business loans.
In this guide, you’ll learn:
- How they work
- How to apply
- The documentation you will need to apply
- What you can use the funds for
- How to compare lenders, interest rates, and loan terms
How does an Unsecured Business Loan work?
An unsecured small business loan is supported only by the current cash flow of a business. The business enters into an agreement with a lender to borrow a fixed amount of funds, which the business will repay over a set period of time through regular instalments. Unlike a secured business loan, they do not require collateral from the borrower as security.
If you are approved:
- A lender will provide you with access to funds.
- You will not have to provide collateral as security on the loan.
- You will have immediate ownership of anything purchased.
- You will make regular repayments to the lender for a fixed period of time.
Borrowers can access cash without risking their personal or business assets, while lenders will often charge higher interest rates that reflect increased risk. These loans are very popular with seasonal businesses, established businesses looking to fund growth, and businesses with a stable monthly cash flow needing to access funds quickly.
Typically, repayments will be daily or weekly - not monthly - to fit in better with your business cash flow.
How do I apply for an Unsecured Business Loan?
Many non-bank lenders will offer unsecured business loans online. Some banks will also offer this type of business finance, including loans designed specifically for small businesses. Lenders will assess an application based on the monthly revenue of the business, its intended use for the loan, how the loan will benefit future business revenue, and more
Each lender will have different approval criteria, such as:
- Loan interest rates and terms
- Minimum and maximum loan amounts
- A personal guarantee by the director of the company
You can apply for an Unsecured Business Loan online with a number of specialist lenders. You can see how each business finance lender compares in our reviews below:
- Prospa Review
- Business Fuel Review
- Lumi Review
- Moula Review
- Beyond Merchant Capital
- Bizcap Review
- Capify Review
- GetCapital
- Limba
- Max Funding
- OnDeck Review
- Sail Review
If you’d like to see a full list of business loan lenders in Australia and learn how to compare various offers, you can visit our Lender Reviews section.
To apply you’ll first want to compare lenders online to get the best rate available.
Who can get an Unsecured Business Loan?
As there is no collateral on an unsecured business loan, they can be used by small businesses without any valuable assets to offer as security. They also allow faster access to cash than some other forms of finance, so are often used by established businesses who need to take advantage of their faster approval process over traditional business loans.
Qualifying is relatively simple. Most lenders will be able to provide options if you have:
- Been trading for at least 12 months; and
- Have an ABN (Australian Business Number); and
- Are registered for GST.
If you don’t meet the above criteria, you can still get approved if you:
- Are self-employed
- Are a sole trader
- Have been trading for between 6 - 12 months.
If the business is relatively new or you are self-employed, the director of the business may be asked to provide a personal guarantee on the loan.
What is the Unsecured Business Loan Application process?
There are two main types of applications, which will depend on the amount you wish to borrow. If you are borrowing less than $100,000 the approval process will be fairly simple. If you wish to borrow more than $100,000, your lender will require additional documentation to assess your application.
If this is the case, you’ll need to provide additional documentation to the lender so they can better assess your application. Here are some tips to improve your chances of getting approved.
Here’s what you may need to provide to a lender when applying:
- If you are borrowing less than $100,000.
- Proof of identity
- An ABN and GST registration
- An acceptable credit rating - the lender will ask to conduct a credit check
- Business bank statements
- Trust Deed if the business is held in a trust
- Australian Tax Office (ATO) Portal access.
- If you are borrowing more than $100,000.
- All the documentation provided if borrowing less than $100,000; and
- Financial records (provided by your accountant)
- Profit and Loss Statements
- Balance Sheet
- Financial records (provided by your accountant)
Provided you can supply the appropriate documents to your lender, have a reasonable company turnover, and good credit history, you’ll likely be approved for your application.
I need a business loan how much can I borrow?
Depending on your risk profile and your capacity to service your repayments, you may be able to borrow between $5,000 and $500,000. As a rule of thumb, most lenders will consider a 12-month unsecured business loan equal to your annual earnings. If your business earns $250,000 per year, you can generally borrow $250,000 on a 12-month term.
Minimum and Maximum Loan Amounts
| Minimum Amount | Maximum Amount |
|---|---|
| $5,000 | $500,000 |
What can I finance for my business?
If you qualify for an unsecured business loan with a lender, you can use the finance for anything related to your business. Here are just some of the ways you could use the funds:
- Assets and equipment
- Buy or upgrade your equipment
- Purchase extra stock in preparation for a busy period
- Upgrade technology to improve efficiency, upgrade payment options or enhance your customer service.
- Business continuity and security
- Cover regular expenses such as tax, lease costs and insurance, where there is a timing issue between income and expenditure
- Provide a working capital fall-back in case of income fluctuations or unexpected costs
- Financial records (provided by your accountant)
- Staff training and business expansion
- Hire new staff
- Train your staff in new techniques or best practices
- Business marketing
- Develop and implement a new marketing strategy
- Establish an online presence to attract new customers
- Business or office fitouts
- Rebrand your business
- Renovate or upgrade your premises
A chattel mortgage will often provide better interest rates for sole traders than other forms of business vehicle finance, such as unsecured personal loans.
What is the term?
Typically, an unsecured loan for business use will be offered for a term of 3 - 12 months, though some lenders will offer terms anywhere between one month and three years
Minimum and Maximum Terms
| Minimum Term | Maximum Term |
|---|---|
| 1 month | 36 months |
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.
What are the interest rates on an Unsecured Business Loan?
There are three main ways lenders will apply interest:
- APR (Annual Percentage Rate)
- Simple Interest Rate
- Factor Rate.
The type of interest applied will make a significant difference to the total amount you will repay. The actual rate applied to your loan will depend on many factors, including
- How much you want to borrow
- The term of the loan
- The profile of your business
- Seasonality
- Declining revenue
- Bank statement conduct.
It’s important to make sure you understand how you are being charged for your business loan - an APR will allow you to easily compare lenders.
What is an Annual Percentage Rate?
Annual percentage rate (APR) indicates what percentage of the loan you’ll pay each year, including all payments and fees relating to the loan over the year when calculating the figure. APR is ideal for borrowers as it gives them a set repayment figure including all fees and charges which they can use to compare with other lenders.
What is a Simple Interest Rate?
Simple interest rates are the quickest way of calculating the interest amount on a loan. Simple interest is determined by multiplying.
- The loan amount
- The interest rate
- The length of the loan.
However, a simple interest rate doesn’t take into account any fees applied to the loan, and therefore makes it less beneficial to borrowers as they cannot accurately compare lenders as they would with an APR
What is a Factor Rate?
Lenders may also advertise a factor rate instead of an interest rate. 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
A factor rate is expressed as a multiple of the loan, rather than a percentage
The factor rate amount will be added to your loan principal and remain fixed for the loan term. This means that even if you make extra payments on the loan balance, the amount of interest you pay won’t change.
How can I get the best interest rate on an Unsecured Business Loan?
You may see unsecured business loans advertised with either of the three types of interest rates. Often, these can appear extremely low or beneficial to lenders, which is why it’s important to calculate the Actual APR on any loan offer to fully understand how much the total loan will cost your business.
In the table below, we’ll look at three loans of the same amount, with the same loan term and repayment frequency. The difference between the three is the advertised interest rate type. You can see below how the application of each interest type really impacts the actual APR and the total amount you are paying for your loan.
Compare Unsecured Business Loan Interest Rates
| Interest Type | Interest Rate | Loan Amount | Loan Term & Frequency | Fees 3% | Actual APR | Total Cost of Borrowing |
|---|---|---|---|---|---|---|
| Factor Rate | 1.15 | $50,000 | 9 months Repaid Monthly |
$1,500 | 38.68% | $9,000.00 ($7,500 interest + $1,500 fees) |
| Simple Interest | 15% | $50,000 | 9 months Repaid Monthly |
$1,500 | 22.36% | $7,125.00 [$5,625 interest +$1,500 fees] |
| APR | 15% | $50,000 | 9 months Repaid Monthly |
$1,500 | 15% | $3,176.86 [$1,676.86 interest + $1,500 fees] |
Our quick-and-easy business loan calculator is a free Money tool you can use to show total repayment and interest amounts on any business loan amount in Australia.
Unsecured Business Loans Summary
Unsecured business loans in Australia offer fast access to cash without requiring the borrower to put down an asset as security.
In summary, an unsecured business loan:
- Gives a borrower access to cash.
- Does not require security or collateral.
- Will often have higher interest rates and fees.
- May be advertised with different types of interest.
- May require a personal guarantee from the business director.
Pros and Cons
| Pros | Cons |
|---|---|
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Unsecured Business Loans FAQ
What is collateral on an unsecured 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
- Your 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 won’t often be required by a lender, it can help reduce your monthly repayments and potentially assist 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 is the typical interest rate I can 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 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 on an offer to see how much you will actually pay.
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 is a personal guarantee?
Even if you meet individual lender criteria, many lenders may ask you to provide a personal guarantee for an unsecured business loan.
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, but are simply tied to your 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
Personal Guarantee Risk Comparison
| Type of Guarantee | Guarantors | Risk to Borrower | Loan Amount Guaranteed |
|---|---|---|---|
| Unlimited personal guarantee | One | Highest | Full |
| Limited personal guarantee | One | High | Set amount by lender |
| Several guarantee | Two or more | Lowest | Fixed percentage |
| Joint and several guarantee | Two or more | Low | Potentially Full Amount |
If your business cannot provide any assets as collateral, it may mean that your personal assets, such as your home, are at risk if your business defaults on its obligations.