Your guide to unsecured business loans [2020]

Henry Baker

Thursday, 06 August 2020

No time for tedious finance applications? Don't have assets to put forward? An unsecured business loan could be for you.

The key difference between secured and unsecured business loans lies in the need for collateral. In contrast to secured finance, unsecured business loans do not require collateral.

Applying for unsecured finance is much faster as a result, because there’s no need to value and itemise assets. This makes an unsecured loan an attractive option to businesses who need finance quickly.

By the end of this guide, you should have an idea of:

  • The types of unsecured finance that might suit you and
  • What it takes to set yourself up for a successful application

What’s collateral?

When lenders offer funding, there’s always a chance that the borrower will be unable to make repayments, no matter how stable their business is or good their intentions are. Things happen. Lenders mitigate this risk by collecting collateral. Collateral is essentially an asset you own and put forward as security. In the case of default, your lender will seize your asset (and sell it) to recoup losses incurred.

Collateral usually takes the form of a property (or equity within a property if it’s not fully paid off). This can be either a personal or commercial property—lenders are more concerned with the amount of equity within the property (the more you’ve paid off, the better), than the type of property you put forward.

In saying that, the resale value of your property will also be a factor they consider—some lenders will only accept property in certain areas or select postcodes.

How do lenders mitigate risk in unsecured lending?

Without collateral, lenders are dealing with a whole new kettle of fish. They’ll look at your credit score, history and cash flow, while also considering the likelihood of your business being successful in the future.

If you qualify for unsecured finance, you’ll also face higher interest rates—another way lenders mitigate the additional risk.

Types of unsecured finance: which one is best for you?

There are four main types of unsecured finance, and the best option for you will depend on the nature of your business, goals and preferences.

Types of unsecured finance include:

1. Term loans

Terms loans are your traditional type of business loan, where you’ll borrow a lump sum from a lender and pay it back over time in instalments, known as principal and interest payments. Principal is the amount you owe and interest is paid on top. Your interest rate will vary depending on your lender, credit history and perceived risk as a borrower. A term loan best suits businesses with consistent cash flow.

2. Lines of credit

A line of credit works similarly to a credit card. It’s a flexible type of finance where you and your lender will agree on a set amount of funds your business can withdraw at any time. You'll only pay interest on what you withdraw, making a line of credit good value and an attractive option. It gives you the ability to purchase goods for your business as soon as you need them, and pay your lender back over a more favourable term. This supports cash flow and the day-to-day running of your business while allowing you to operate efficiently and grow.

3. Overdrafts

Business overdrafts let you withdraw funds even after your account balance has reached zero. You can borrow up to a set limit of funds determined by you and your lender. Like a line of credit, you only pay interest on what you withdraw. Overdrafts are great for seasonal businesses, new businesses or those with regular fluctuations in cash flow. For example, a business that sees most of their sales in one month per year, but still needs to pay wages year round.

4. Credit cards

Both personal and business credit cards are flexible unsecured finance options. You’re probably familiar with how a personal credit card works—it’s similar to a line of credit in that you can make purchases upfront and then pay your lender back over a more favourable term. Business credit cards work in the same way, but they’re specifically for your business. This separates them from your personal account and finances. Credit cards give you the ability to run your business the way you want without needing repeat funding approvals from your lender.

Unsecured business loans for new businesses

As a start-up or new business, you might not have access to collateral for a secured loan. This creates a chicken-and-egg problem because while you have to start somewhere, you also need money to make money.

While it’s harder to qualify for funding as a start-up, there are a few options that might suit you:

1. See if you qualify with an alternative lender

Business loans from banks are traditionally harder to qualify for. By going through a non-bank or alternative lender, you cut through most of the red tape and benefit from more lenient approval criteria. Of course, higher interest rates are usually involved but that’s the trade-off until you’ve grown your business, in which case you could look into refinancing your business loan.

2. Turn to family and friends

If your startup idea is truly great, it shouldn’t be difficult to get family and friends on your side. Their support could be the difference between getting your business off the ground or having it dwindle into a missed opportunity. Set up a short-term finance arrangement or partner up with like-minded friends, family members or acquaintances. You might even find a great business partner in the process, willing to bridge gaps in your skillset for a share in your business.

3. Save, save, save

Many startup and small business owners get their companies off the ground with their own hard-earned dollars and personal assets. If you have equity within a property, savings, or other valuable assets, you’re already off to a head-start. If not, start putting money aside into a savings account while you brainstorm ideas and develop your business plan.

4. Get investors onboard

Crowdfunding is another option. Connect with like-minded investors who see potential in your idea. They’ll help you kickstart your business, and many of them will be interested in sharing their skillset as well. After all, the success of your business is in their best interest.

Tips for a successful unsecured finance application

So, you’re ready to apply for unsecured finance. What can you do to make sure you have the best shot at approval? Here are our top tips:

  • Get your credit score where it needs to be. Your credit history is important to lenders when they’re considering offering unsecured funds to you—without assets, they’re dealing with a higher level of risk. A poor or even average credit score raises red flags.
  • Start small. Paying off a personal credit card can build trust and instil confidence in lenders while giving your credit score a boost.
  • Make repayments on time. Woo your lender with a great track record of managing personal finances. This proves you’re responsible and increases your creditworthiness.
  • Get paperwork together ahead of time. Lenders will ask to see your financials, including your balance sheet and bank statements. Have these handy.
  • Speak with a lending expert. If you’re worried or have questions about your eligibility for unsecured finance, chat to a lending expert free of charge to find out where you stand. Applying for finance when you’re unsure of your chances risks damage to your credit score. Our experts can check what you qualify for before starting an application—better to be safe than sorry!

With 100+ years combined experience in business lending, our experts are trained to help you find and apply for the right finance, even in difficult situations or unique scenarios. Find out how we can help and finally grow the business you want.

Henry is a Senior Product Specialist specialising in working capital solutions. He loves helping entrepreneurs achieve their growth goals and getting to know their businesses in-depth, in order to find the most fitting product for their needs.

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