7 factors that determine your unsecured business loan interest rate

Glenn Westoby

Thursday, 03 September 2020

If you’re thinking of taking out unsecured finance, you might be wondering what you can expect in terms of interest rates.

The fastest way to find out is via this two-minute form. With it, you can find the lowest unsecured rates based on products from 80+ leading lenders.

This post explores the factors lenders consider when deciding on your unsecured finance interest rate, so you can make sure you’re in a good position to apply.

What are unsecured business loans?

With an unsecured business loan, you can borrow a lump sum of cash and just like a regular secured term loan, you’ll pay your lender back in instalments. The only difference is that unsecured lending does not require collateral.

Collateral is essentially any asset (usually a property) that you secure your loan with to lower your risk as a borrower. You’ll put your asset forward and your lender will value it to determine its worth. The more valuable your asset, the lower your interest rate and higher your borrowing power.

In the case of default, your lender will seize and re-sell your asset to recoup any losses incurred.

Without collateral, your lender must rely on other factors to determine your perceived level of risk as a borrower, and offer an appropriate funding solution based on this information.

Secured vs unsecured business loan interest rates

Unsecured business loan interest rates tend to be higher than secured interest rates. This is simply because you’re perceived as a riskier borrower without collateral.

Your lender is trusting that—based on the factors below—you’ll be able to repay the borrowed funds. Of course, even when taking the below factors into consideration, they’re dealing with a higher level of risk.

Factors that influence unsecured interest rates

There are seven main factors that help lenders decide whether they’ll offer you funding, how much and at what rate. These factors determine both your eligibility for unsecured finance and the interest rate in which you’ll be charged if you’re successful in applying.

1. The health of your business

Lenders will want to see your financials to get an idea of how your business is performing. They’ll typically look at your gross profit margin, profitability, current ratio, quick ratio and net tangible assets. If your business is in good shape, chances are your interest rate will reflect this.

2. The economy

You can expect higher interest rates in a booming economy. On the other hand, it’s common for interest rates to drop significantly in a recession.

3. Your trading history

Been around for a long time? That’s great news to lenders. Length of time trading is one factor that can prove the stability of your business, and this tells lenders you’ll be less likely to default on your loan and more likely to pay on time and in full.

4. Your lender

Just like shopping for a house or car, rates on business finance vary depending on where you look. Bigger banks usually offer lower interest rates, as their cost of capital is lower and they have stricter approval criteria. This is also why they only accept lower risk customers.

5. Your chosen loan amount

The amount you borrow—as well as the type of facility and loan term you choose—will largely determine how your interest rate will look. By nature, unsecured finance usually comes with shorter loan terms and higher interest rates.

6. Your credit score

A healthy credit score and history prove you’re responsible with finances, making you a less risky borrower in lenders’ eyes. If your credit score is considered ‘excellent’, you’ll likely be rewarded with a lower interest rate.

7. Whether you choose a fixed or variable rate

Fixed interest rates are locked in, so you know exactly what you’ll be paying over a set term. This is great if predictability is important to you, as you won’t have to worry about interest rates soaring if the market turns.

On the other hand, if you’re on a variable interest rate, your repayments will change with the market. There are pros and cons to both fixed and variable rates. We recommend speaking with a lending expert to find out which one is right for you.

How to get a lower rate on unsecured finance

Take a look at your credit score

Unsecured interest rates depend heavily on your credit history, since you’re not putting any assets forward. Having a positive track record is therefore crucial.

Someone who can prove they’re reliable with credit (supported by a positive history of managing finances) is in a much better position than someone who has no history, or worse, a black mark against their name.

In addition, applying for credit unsuccessfully (whether unsecured or secured finance) can damage your credit score. Valiant can quickly find out what you qualify for before you apply, so you can avoid taking on this risk.

Guarantee your loan

Providing a guarantee means you’ll be personally liable for paying off your loan in the case of default. In the absence of collateral, some lenders actually require a guarantee before they consider offering you unsecured funds.

Compare offers

There are hundreds of unsecured finance products on the market for businesses in Australia. Rates vary, and the only way to truly know you’re getting a good deal (and a product that works for you) is by comparing solutions.

A Valiant lending expert can take on the heavy lifting for you, saving you time while finding an unsecured finance solution that makes sense for your business.


Glenn manages a team of working capital and asset finance product specialists here at Valiant, ensuring clients get the very best outcomes for their businesses.

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