Unsecured business lending: Are you eligible?

Nicki Ghazi

Monday, 30 March 2020

Unsecured finance can be a great solution if you’re a startup or small business looking for funding, without access to large assets for collateral.

And, if you need cash quickly, you’ll be glad to know that unsecured finance can be organised for you in as little as 24 hours by one of our lending experts. That's because assets used for collateral take a long time (sometimes months) to be valued. Because unsecured finance eliminates the need for such assets, you skip this part of the application process entirely.

What’s an unsecured business loan?

An unsecured business loan allows you to borrow money without security. For context, a secured loan requires security (collateral), which is an owned asset such as a property.

Not every business has access to a property, or other assets required for secured lending. And, even if you do, you may not want to put your assets on the line upfront. That’s where unsecured lending comes in.

It’s important to note that unsecured finance often comes with higher interest rates to account for the added risk in lending without security. However, as mentioned, it shaves hours off of the application process, making it a great option for businesses who want cash quickly, or simply don’t like the idea of offering up assets. Wondering if you qualify? Let’s find out.

What factors determine eligibility for unsecured finance in Australia?

Factors that lenders look at when deciding whether to offer you finance include:

  • Overall creditworthiness
  • Time in business
  • Health of your business
  • Nature of your business

Let’s take a closer look at how these factors are assessed.

1. Your credit score

Your personal and business credit score is a big factor in determining whether or not you’ll be approved for finance. With a poor credit score, it’s unlikely you’ll be able to obtain finance. A great credit score backed by a history of responsible borrowing gives your lender confidence in your ability to make timely repayments.

Your credit score may also determine your interest rate. The higher your score, the lower your interest rate may turn out.

2. Your time trading

The longer you’ve been trading for, the more reliable you are, assuming you have a positive reputation. This one is a no brainer. Time gives your business a chance to prove long-term success, which instills trust and confidence in your abilities.

If you’ve been around a long time, doing great things for your community, your track record has already done wonders in helping to get an application over the line.

3. Your position with the ATO

Consider how much ATO debt you have in relation to your annual turnover. If BAS lodgements are behind and your debt is high in relation to your turnover, you may have trouble receiving finance approval for your business. Your ATO debt should not exceed 8-10% of your turnover.

4. Property ownership

You may not want to put your assets on the line upfront, but regardless, owning a property is favourable in the eyes of a lender. If you want a large amount of cash, property ownership becomes even more important.

5. Your balance sheet

Your lender will want to view your financials, including your balance sheet. This is particularly important when assessing eligibility for full doc business loans or larger loan amounts. If, on the balance sheet, your net assets are negative, this makes your business insolvent. If you tried to sell your business it would not hold any value.

6. Your repayment history

Not only do lenders look at your credit score, but overall borrowing habits to determine how reliable you are with finances. They’ll review your ongoing commitments and repayment history to make sure you’re able to successfully manage finances and make repayments on time and in full.

7. Your cash flow trends

Lenders will look at your cash flow trend to determine whether it’s positive, negative or consistent. Ideally, your cash flow will be positive or consistent depending on your business (e.g. a seasonal business may have inconsistent cash flow, which isn’t necessarily problematic).

If, however, you display a negative cash flow trend, your lender may not approve your finance application, or at best, lend to you conservatively.

8. Spread of income sources

This factor is particularly relevant to B2B businesses. Let’s say you have three clients, but lose one of them due to the COVID-19 outbreak. Assuming each client paid you the same amount, you’ve now lost one third of your usual income.

Lenders understand that a business with few clients means a single loss can cause significant damage. If you had twenty clients, on the other hand, losing one would not create such a big impact.

Lenders prefer a wide spread of income sources to mitigate these uncontrollable and unforeseen circumstances. We all know how quickly things can change.

9. Month on month sales consistency

Are your sales consistent over time? Consistency and reliability are two major green flags lenders look for when deciding whether to offer you finance. If you can prove that your business is producing a consistent number of sales each month, you’ll increase your chances of an approval.

10. The industry you’re in

The industry in which your business operates is another factor that determines the outcome of your finance application. Some industries simply perform better than others. For example, businesses within certain industries have a regular income coming in throughout the year, while others are seasonal in nature, like ski resorts, food trucks and Christmas retailers.

11. Deposits per month

Many lenders prefer, or sometimes require, four deposits per month in order to approve your finance application. The less ‘lumpy’ your income, the better.

12. Average cash balance in account

Lenders will look at the average figure in your bank account and make sure that it exceeds your scheduled direct debits.

‘Green flags’ that lenders look for when assessing unsecured finance applications

Without collateral, lenders are dealing with a whole new kettle of fish. In addition to considering the factors above, lenders love seeing:

  • More than one director, or shareholder guarantee.
  • Property-backed guarantees, especially in unprecedented economic times.

These ‘green flags’ further help to mitigate the risk involved in lending to you without security.

The nitty gritty: How do I prove my business is profitable?

It doesn’t necessarily matter how profitable your business is when it comes to getting approved for finance. Think about it from a lender’s point of view: as long as you’re meeting your repayment commitments, they can make it work, particularly for nonbank lenders.

In saying that, your ability to run a profitable business can put you in a favourable light, regardless of whether that changes your ability to qualify for finance.

With a low doc loan, only bank statements are assessed for eligibility, and on occasion, your BAS (Business Activity Statements). So, in these cases, approval will be based on cash flow and your ability to make timely repayments.

On the other hand, applying for larger loans (that often require a more thorough review of documentation) will not only require bank statements, but other financials as well, including your Profit & Loss Statement (P&L) and Balance sheet.

Improving the health of your credit score (if it’s not already where it needs to be) is the most important thing you can do to increase your chances of unsecured finance approval. Showing that you’ve been able to make timely repayments in the past is key. After all, past habits are great predictors of future behaviours.

Why are unsecured business loans declined?

Specifically, unsecured business loans are declined for the following reasons:

Your credit score is too low

Depending on your credit reporting agency, your score will fall between negative 200 or zero and 1000 to 1200.. Your score is calculated based on your past financial history as a borrower i.e. recent credit/loan applications and whether you’ve made repayments on time.

What’s a good credit score? To give you an idea, we’ve listed scores considered ‘excellent’ and ‘poor’ according to each credit reporting agency in Australia.

Equifax

  • Excellent: 833 - 1200
  • Poor: 0 - 509

Illion

  • Excellent: 800 - 1000
  • Poor: 0 - 509

Experian

  • Excellent: 800 - 1000
  • Poor: 0 - 299

If your credit score is considered poor, bank and premium non-bank lenders may not approve your unsecured finance application.

Having anything adverse on your credit file (personal or business), such as a court judgement or default, will likely lead to a declined application.

You’ve been trading for less than six months

Lenders like to see that you’ve been trading for more than 24 months, and anything below this limits your options, or leads to a decline altogether. If you’ve been trading for less than six months, it will be challenging to get your application over the line.

Why? Your track record is limited, which makes your business’ potential unclear. No matter how much planning and roadmapping you do, it can be hard to judge a business’ success as an owner, let alone a lender. Every business comes with some level of risk.

Your ATO debt is too high

Every business has debt, but too much will turn your lender away. It shows that you’re potentially having trouble managing your business’ finances, making repayments or keeping your business afloat.

Your Debt Service Coverage Ratio is missing the mark

Using bank statements, a lender will verify your business’ income, financial commitments (such as other loans) and fixed costs (such as rent and wages). They’ll then apply an industry margin to your business’ current financial state, to see what surplus is left over. This helps your lender determine whether you’ll be able to service your new loan.

If your lender has any reservations about your ability to service the loan, they may hold back from assisting you until you’ve reduced costs, debt or improved your business’ financial health overall.

How COVID-19 affects eligibility criteria for unsecured finance

Some of the factors we’ve mentioned above are more important now than ever, since the devastating outbreak of COVID-19.

Cash flow trends will be reviewed more closely, and lenders will want to see that your business has a wide spread of income sources to make up for a potential drop in income. If you have just one or two sources of income, lenders may view you as high-risk. Having little or no ATO debt has become more favourable than ever for nonbank lenders as well.

Monthly sales must also be consistent. If your business has lumpy or inconsistent income deposits, lenders will be cautious.


As you can see, unsecured finance can be difficult to qualify for, but for some businesses (particularly those who need finance quickly or don’t have suitable assets for collateral) it can work wonderfully.

Need cash now? We can organise unsecured finance for you in as little as 24 hours. Simply get in touch with a lending expert—we’ll confirm your eligibility before finding you a great rate.


Nicki is our Senior Working Capital Manager. She works with a team of talented product specialists, leveraging 25 years combined experience to help Aussie businesses find tailored finance solutions.

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