Types of business finance

What is an unsecured business loan?

As a business owner in Australia, there are various kinds of business loans available from traditional lenders such as banks, non-bank lenders, fintechs and other credit organisations. For short-term needs and cash flow management, an unsecured business loan is a popular choice among many business owners.

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What is an unsecured business loan?

An unsecured business loan is a type of commercial funding where the loan is not backed by some form of collateral, such as property or equipment. By contrast, secured business loans are backed by assets that act as a guarantee for the loan and, therefore, could be repossessed in the event of a default. As unsecured loans are not backed by business or personal assets, they represent a higher risk for the lender and usually have higher interest rates and fees. Because they're riskier for the lender, they are usually given to businesses or individuals with good credit ratings.

Unsecured business loans can be used for a variety of purposes, such as working capital, inventory, or equipment, and may be the right option for businesses that do not have the collateral to put up for a secured loan.

How do unsecured business loans work?

The repayment period for an unsecured business loan is typically between three months and five years. However, some lenders may offer repayment periods of up to seven years. The longer the loan term, the lower the monthly repayments will be, but you typically will pay more in interest to the lender due to the interest being calculated over a longer period of time.

What is the difference between an unsecured and secured business loan?

Both are term loans, where the funds must be repaid over a given period of time with interest. The main difference between the two types of loans is that a secured loan requires a security asset, whereas an unsecured loan does not — this increases the level of risk involved for the lender. With a secured loan, the lender has the comfort of knowing that they have some form of security should the borrower default on the loan. This security gives the lender a greater level of protection, and as a result, they are typically willing to offer lower interest rates and better terms to borrowers. 

Unsecured loans are considered to be a higher risk for lenders as they have no security to fall back on should the borrower default. As a result, unsecured loans tend to come with higher interest rates and less favourable terms for borrowers. 

For many businesses, a secured loan will be the best option as it offers the most favourable terms. However, there may be some instances where an unsecured loan makes more sense. For example, if a business has few assets and, therefore, no security to offer, an unsecured loan may be the best option available. 

How much do unsecured business loans cost?

How much you end up paying for an unsecured business loan in Australia will depend upon the amount you borrow, the length of the loan term, the interest rate, any fees and charges, and your creditworthiness.

While you choose the amount you apply for, the approved amount is up to the lender after assessing your ability to repay the loan and your creditworthiness. Your credit history determines your creditworthiness and may be used to decide the interest rate you will pay — it can also be the difference between being approved and being rejected.

Typical unsecured business loan interest rates

Due to multiple players in the market and different unsecured business loan offerings, the interest you pay can vary significantly in Australia. The actual rate you pay will depend on the lender, the size of the loan, the loan term, and your credit history. You may also be able to choose between fixed interest rates and variable interest rates.

Who can get an unsecured business loan?

Essentially, any business meeting the lending criteria can get an unsecured business loan. However, eligibility alone doesn't mean suitability.

Unsecured loans may be suitable for businesses that:

  • Need a quick cash injection
  • Want the flexibility of a shorter loan term
  • Lack the collateral to get a secured loan

Secured loans may be suitable for businesses that:

  • Want a larger sum for operational equipment, such as machinery or vehicles.
  • Want to make repayments over a longer period of time.
  • Have assets that can be used as collateral.

Unsecured business loan calculator

An unsecured business loan calculator is a great tool for business owners in Australia to help determine how much you can borrow and what the repayments will be. Running cost comparisons against different products with varying interest rates, fees and charges can also help you compare offerings from different lenders to find the best deal.

How much can I borrow?

Unsecured business loan amounts are approved based on your likelihood and ability to repay the loan. The turnover of the business, as well as the business credit score and scores of any key people of the business.

Unsecured business loans range from as little as $1,000 up to sums in the millions, depending on who the lender is. The lender will determine your exact loan amount based on credit criteria and serviceability requirements.

When considering an unsecured business loan, make sure you compare different lenders to find the most competitive interest rate and terms. And remember, just because you can borrow a large amount of money doesn't mean you should. Make sure you only borrow what you need and can comfortably afford to repay, so you don't put your business at risk.

Should I get an unsecured business loan?

One of the main advantages of getting an unsecured business loan is not having to put up any assets as security, which can be beneficial if you don't have any assets to offer! However, there are many factors to consider when deciding whether or not to get an unsecured business loan in Australia. 

Under the Responsible Lending Obligations set out in the National Consumer Credit Protection Act, a lender is prohibited from providing a loan to someone who is unable to repay it. However, being approved for a loan on paper doesn't mean you'll actually be able to comfortably keep on top of repayments in reality — especially if your circumstances change significantly or you experience uneven cash flow.

If you are not sure that your business cash flow will allow you to keep up with regular repayments, it is best to speak to a professional to get an idea of whether or not you will be able to comfortably make the payments. 

Another thing to consider is the interest rate. Unsecured business loans typically have higher interest rates than secured loans. This is because the lender is taking on more risk by lending you the money without any collateral. 

If you are confident that you will be able to repay the loan and you are comfortable with the interest rate, an unsecured business loan may be a good option for you. Just be sure to do your research and compare different lenders to get the best deal.

Where to get an unsecured loan

Many small business owners are unable to get secured loans from traditional banks, as they do not possess the required collateral or lack suitable financial records or credit score.

Non-bank lenders and fintechs stepped in to fill a gap in the market by offering funding opportunities to businesses in these situations. Many banks now also offer unsecured loans, in addition to more traditional secured loans.

To apply for an unsecured business loan, a lender will want to know the following about your business:

  • Your turnover - there will be a minimum requirement, and the loan amount may be based on this.
  • Time in business - usually a minimum of 6 to 12 months.
  • Type of business - what is the structure? Are you registered?
  • Business premises - how long have you been leasing your current address?
  • Your credit history - as well as any directors of the business.

They may also want to see a business plan, forecasts and your plans for the funds.

Pros and cons of unsecured business loans

Table Example
Pros Cons
Less risk to the borrower. In the case of default, they won’t lose personal or commercial property More risk to the lender, resulting in higher rates and fees.
Most unsecured business loans come with lower rates than a business line of credit or credit card. Higher rates than a secured loan.
Quicker application process. Funds can be available in hours with less documentation. Less finance available. The amount loaned is often based on turnover, so if your sales are low, you'll only be able to access small business loans.
Increased flexibility. Fewer limitations on how the funds can be used, may include a redraw facility or the option to repay early. Businesses with bad credit may struggle to get approval. There are types of loans suited to applicants with poor credit history.

Disclaimer: always refer to professional advice. The information presented here is purely indicative and not intended as advice. Always consult a legal or finance professional.

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