Unsecured Business Loan overview
What Is An Unsecured Business Loan?
Unsecured business loans allow you to borrow money for your business without the need for collateral. Unlike secured loans which require you to borrow against an asset such as a vehicle or property, unsecured loans aren’t guaranteed. As a result of not requiring any collateral, unsecured loan applications are often assessed on the basis of business cash flows and the borrower’s creditworthiness.
This means that for an unsecured business loan, the financial health of your business and your credit score will have a larger impact on whether you are approved.
Unsecured business loans are short-term by nature. Depending on the lender, unsecured business loans can be provided for anywhere from 3 months to 3 years, however, some of our peer-to-business lenders can provide an unsecured business loan for up to 5 years.
The key feature of an unsecured business loan is that it does not require any collateral; i.e. no one can make a claim on an asset of the business if repayments can't be made. This makes the loan more risky when compared to a secured business loan and as a result, lenders will charge a higher interest rate and provide the funds for a shorter amount of time.
Unsecured loans can be used to finance any business-related costs. It gives you the flexibility to smooth your cash flow, purchase equipment, and access funds quickly.
Pros And Cons Of Unsecured Business Loans
✓ Simple Application Process ✓ No Security Required ✓ Funds Available Fast ✓ Builds Lender Trust ✓ Assets Are Protected ✓ Improved Credit History ✓ Higher Credit Limit
X High Interest Rates X Personal Guarantees X Difficult To Qualify For X Smaller Loan Amount X Shorter Loan Terms X Liability Requirements X Repayment Penalties
Benefits Of An Unsecured Business Loan
An unsecured business loan allows your business to gain faster access to cash compared to other business loan products and is a great alternative if you do not want to use your personal or business assets as collateral.
If your business defaults on an unsecured business loan, the lender won’t be able to seize any of your personal or business assets like they would if you defaulted on a secured business loan. An exception to this is if you have provided a director’s guarantee as a part of the unsecured business loan. If this is the case then your business assets will still be safe, but you will be personally financially liable for covering any default made by the business.
✓ The application process is fast and simple It is easy to apply for an unsecured business loan, because no security is required. You do not have to itemize your assets and the lender does not have to value that collateral. You can apply for an unsecured loan online, usually in just a few minutes, and the turnaround time is much faster than a secured loan.
✓ There is no security required The main advantage of an unsecured business loan is that no security is required. If you do not have collateral such as property or other fixed assets, you can still access funding. It also means you can liquidate or upgrade your equipment as you need.
✓ You gain access to the funds quickly The unsecured business loan application process is quick. There is less paperwork required and less to evaluate, so they have a much faster turnaround time. A straight-forward unsecured loan application can be approved in as little as 2 hours with same day turnarounds and settlements up to 24-48 hours.
✓ It helps to build a relationship with your lender Approval of an unsecured loan shows a high level of trust between you and the lender. It requires that the lender trust you and your business. Once you have paid it back, it can lead to an even higher level of confidence, easier access to finance, and potentially better terms.
✓ They are easier to access Unsecured loans give businesses who do not meet the bank’s rigorous lending criteria the opportunity to access financing. Even if you do have property to present as collateral, you may still be able to find funding via an unsecured loan.
✓ You and your business assets are safe If you are unable to repay a secured loan, lenders are able to seize the business assets that were used to secure the loan. Comparatively, unsecured loans do not put your assets at risk. If for some reason you go bankrupt, unsecured loans may be able to be discharged.
✓ It improves your business credit score Successfully paying off your unsecured loan will help to build your credit history, improve your business credit score and make it easier to obtain a loan in future.
✓ The loan is not constrained by the collateral value Secured loans are typically constrained by the value of the property or asset being used as collateral. Unsecured loans, however, are dependent on your business credit score and cashflow.
Drawbacks Of An Unsecured Business Loan
Given collateral is not required, unsecured business loans are generally a riskier type of loan to give for lenders. To compensate them for the additional risk of default relative to a secured term loan, unsecured term loan lenders will often charge a higher interest rate and provide the loan for a shorter time period.
When applying for an unsecured business loan, the cash flow health and creditworthiness of your business will have a much higher impact on the approval of any application. Lenders will therefore place most focus on the bank statements of the business, assessing inflows & outflows, conduct and existing commitments, to determine an amount they are able to comfortably lend whilst leaving some surplus. Secured lenders look at more elements when assessing applications, whereas unsecured lenders typically base their decision on bank statements and credit scoring, thus if a business owner accidentally overdraws their account a few times, it may lead to an unfavourable outcome.
X Your interest rate will be higher Unsecured loans are higher risk for lenders than secured loans, and as such the interest rates are often higher. You will likely pay more for an unsecured loan over the long term, depending on the quality of your credit score.
X A personal guarantee is generally required While an unsecured loan does not require you to put down assets or property, this doesn’t leave you completely off the hook as many lenders may require that you provide a personal guarantee. This means you will be held personally responsible for repayment of the loan if your business cannot afford to pay back the loan balance.
X They can be difficult for some businesses to qualify for The high-risk nature of unsecured loans means lenders can be stricter with their lending criteria. This means if you have a poor personal or business credit score or no credit history at all, you may find that you don’t qualify for funding.
X Loan amounts can be smaller To mitigate risk, some lenders will reduce the amount that they are willing to lend without security. This results in lower loan amounts being offered to business owners.
X The tenure of the loan is shorter Some lenders require a tighter repayment schedule to reduce their risk. This can mean you don’t have access to funds for as long as a secured loan and it can be difficult to extend your loan terms.
X Repayment penalties could be applied Lenders want to dissuade their borrowers from paying back their loan balance too quickly. They do not want to lose out on the potential interest that will be gathered for the duration of the loan repayment period. To deter borrowers from paying back their loan immediately, they may charge additional fees or have a minimum stay-in period.
Are You Eligible?
Check the eligibility criteria below to see if you qualify.
- Australian Business
- Annual Turnover Of $75k+
- Trading For 3 Months+
- Run A Profitable Business
- Be Creditworthy
Common Reasons Unsecured Loans Are Declined
Unsecured loans are higher risk for lenders, which means that the eligibility criteria are stricter. We work with over 70 lenders, so we can explore all of your options in depth and ensure we find you a loan, rate, and terms that work with you.
- Poor credit score
- Outstanding Debt
- Young Business
- Weakening Industry
- Seasonal Business
- Inconsistent Revenue
Secured Versus Unsecured Business Loans
The main difference between a secured and an unsecured business loan is that a secured loan requires that you have assets that you are willing to put down as collateral against your loan. An unsecured loan does not require that you borrow against an asset or property.
Secured loans Secured loans are more commonly offered by banks. They provide businesses with access to larger loan amounts than unsecured loans because they are lower risk for lenders.
Unsecured loans Unsecured business loans do not require you to put up assets as collateral. They are usually smaller in value and have higher rates than secured loans due to the risk to lenders.
Applying For An Unsecured Business Loan
In order to provide approval for an unsecured business loan, lenders will need to be comfortable that your business will be able to support any required loan repayments.
In order for lenders to assess the stability and risk of your business, they will often require you to provide a combination the below as part of an application for an unsecured business loan:
- Business financial statements
- Business tax returns & statements
- Business bank account statements
As a part of the application for an unsecured business loan, you may be asked to provide a ‘director’s guarantee’. This means that you - as a director - are ‘guaranteeing’ that the loan will be paid back and that if the loan can’t be paid back and goes into default, that you will be personally financially liable for the repayments. This could potentially involve the lender seizing personal assets to recover the value of the loan.
1. Provide Some Info Tell us a bit about your business and your unsecured business loan needs.
2. Compare Lenders See the loans and lender that you pre-qualify for and compare your options.
3. Apply Today Complete your application or chat with one of our business loan advisors.
What Is An Unsecured Business Loan Best Used For?
An unsecured business loan can be used for a myriad of business expenses. Whatever it is that you need for your business, an unsecured loan can help you finance it.
Due to the short life-span of an unsecured business loan, they are best suited to aiding short-term working capital needs rather than funding large, lengthy business projects. As an example, they are a fantastic way to give your business some temporary breathing room when paying wages or suppliers.
Unsecured business loans also provide a great quick cash-boost to allow you to take advantage of and kickstart potential growth opportunities for your business. A great example of this is if there is an opportunity where you know some additional marketing spend would result in an increase in sales but you don’t have the cash for it — an unsecured business loan would be a perfect way to raise the funds to undertake the marketing and grow your business.
- Purchase property
- Renovating business
- Buying inventory
- Hiring employees
- Buy equipment
- Increase working capital
- For marketing
- Move premises
- Pay staff
- Tax payments
Frequently Asked Questions
Am I eligible for an unsecured loan? A few factors determine whether or not you will qualify for an unsecured loan. These include the length of time you have been trading, your financials, your credit score, your cashflow, and your monthly turnover. If you aren’t sure if you qualify, you can use our free loan wizard to find out.
What do I need to apply? Unsecured loans do not require as much paperwork as a secured loan. Basic information, such as your previous 3 banks statements and identification, are required as a minimum.
How much can I borrow? The maximum you can borrow will is typically based on your most recent bank statement. Your cashflow, credit and the lender do impact this number as well. Typically, we see unsecured loans max out at around 250K.
How long will it take me to apply? Applying for an unsecured loan is relatively quick. Our team can help you with the application over the phone and this will typically take just a few minutes.
How long until I know if I’ve been approved? The quick turnaround time for an unsecured loan means our team may be able to get you an answer on the same business day.
How much interest will I pay? The interest rate is impacted by a range of factors, including your cashflow, your credit, the health of your business, the lender, the term, and more. Unsecured business loan interest rates typically sit around 10-20%.
Can I pay off an unsecured loan early? Yes, you can typically pay off a business loan early however most lenders will not allow you to make early lump repayments on top of your usual weekly/monthly payment. However, most lenders will allow you to pay out early in full without penalty i.e. just pay back the remaining principal. A few lenders may charge you for interest of the full term or part of the term as some may have a minimum stay-in or lock in period. Therefore it is important to consult one of our working capital specialists to help you choose a lender that offers flexibility without penalties.
What is the standard loan term? Unsecured loans are typically used as a short term source of financing due to their higher interest rates. They can, however, be anywhere from 3 months to 5 years (less common), with most unsecured loans being repaid over a 12 month period.
When will I get the money? One of the main benefits of an unsecured loan is how quickly you can get your funds. Depending on the complexity of the loan and the specific lender requirements, the funds may be in your bank account in as little as 24 hours.
Who offers unsecured business loans? There is a range of non-bank unsecured business loan lenders in Australia. We work with over 70 of these lenders to provide businesses with a simple way to compare their terms and rates. Our goal is to ensure that you find the right financing solution for your business.