1.
How they work
2.
How to apply
3.
The documentation you will need to apply
4.
How much you can borrow
5.
What you can use the funds for
What is an Unsecured Business Loan?
An unsecured business loan is a type of finance that allows a business to acquire funds up to $600,000 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.
How do they work?
These types of unsecured finance loans are supported by the current cash flow of a business. They work in a similar way to a secured business loan, with the main difference being that they do not require collateral (also known as “security”) from the borrower.
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 this increased risk. These loans are very popular with:
- Businesses looking to fund growth — i.e. Expansion, inventory, or renovations
- Businesses with a stable monthly cash flow needing to access funds quickly
- Seasonal businesses
Typically, repayments will be daily or weekly to fit in better with your business cash flow. According to data provided by Prospa, 33 per cent of businesses make daily repayments, and the remaining 67 per cent opt for weekly repayments.
You can use the business loan calculator to estimate various repayment amounts and compare offers.
How do I apply?
Some banks will 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 also apply for an unsecured business loan online with a number of specialist lenders. These lenders offer the fastest approval speed in return for charging higher rates of interest.
Access to cash for your business today could allow you to make crucial business decisions and potentially repay the loan amount much earlier than the end of the established term.
You can see how each business finance lender compares in our reviews below:
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. In fact, 38 per cent of borrowers own a business operating for less than three years, according to a report by Australian lender, Prospa.
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 — an additional 38 per cent have been operating between 4 - 7 years (26%) and 8 - 10 years (12%).
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 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 $600,000.
As a rule of thumb, most lenders will consider a 12-month unsecured business loan equal to your monthly earnings. If your business earns $30,000 per month, you can generally borrow $30,000 on a 12-month term.
Minimum and Maximum Loan Amounts
| Minimum Amount | Maximum Amount |
|---|---|
| $5,000 | $600,000 |
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 fit-outs
- Rebrand your business
- Renovate or upgrade your premises
If you are buying a business vehicle, a chattel mortgage will often provide better interest rates than other forms of business vehicle finance.
What are the terms?
Typically, an unsecured loan for business use will be offered for a term of 3 - 18 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 rates?
You may see unsecured business loans advertised with three different types of interest rates:
- APR (Annual Percentage Rate)
- Simple Interest Rate
- Factor Rate.
Often, these can appear extremely low or beneficial to lenders, which is why it’s important to understand how each rate works so you can properly compare loan offers.
Want to compare loans using factor rates? You can use our calculators to convert factor rate to APR.
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
Unsecured Business Loan 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.
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 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.
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.
