Not so long ago, unsecured business loans were rare and very hard to find. Most lenders, especially the banks, insisted business owners provide security – usually real estate.
Thankfully, in recent years, many tech-driven enterpreneurial lenders have created a range of business loans that don’t require borrowers to put their homes on the line.
The loans can be used for a variety of purposes – to buy stock, kick start new projects or simply escape a tricky financial situation and get back on your feet.
What is an unsecured business loan?
The best way to explain an unsecured loan is to compare it with a secured loan like a mortgage against your home.
A mortgage allows the lender to take control of your property and recover funds if you default on the repayments.
In the case of an unsecured business loan, the lender does not lodge security over your home or personal assets.
Instead, it relies on your company’s cash flow and strength for comfort.
Having said that, not all unsecured loans are “unsecured” in the broad sense of the word.
Many lenders will obtain security over some or all of the assets of your company.
A charge may be lodged on the Personal Property Securities Register which means the lender will be amongst the first in line to recover funds if your company is wound up.
Some may also ask you to sign a director’s personal guarantee.
Be aware that this can expose your personal assets to the lender, so read the fine print.
What types of unsecured business loans are available
- Credit cards
- Business Loan
- Line of credit
- Invoice or Supply Chain Finance
- Trade Finance
Each is suited to a different situation
For example, a business loan might a suit a borrower who has a specific purchase or project in mind and requires the certainty of knowing how much the repayments will be and when they will be due.
A line of credit might be more suited to a company with lumpy or irregular cash flow. The borrower draws funds only when required and then repays the money to use again later. Interest is charged only for funds you use not for the entire credit limit.
Invoice finance might best suit a business owner who has customers on extended payment terms and who needs cash much sooner. The invoice finance company can offer cash for the invoices at a discount to their face value and collects its funds when customers pay.
Not all business loan types are created equal and it is wise to take the time to ensure that whatever facility you take will suit your needs. The best way to ascertain that is to talk with a professional. If you are looking for one we can put you in touch with a suitable adviser. Complete the contact form below.
How much can I borrow and how much will it cost?
Lenders will decide how much you can borrow based on why you want the money, your company’s turnover, its ability to repay the funds and its credit history.
Lenders advertise loans ranging from $5,000 to $10,000,000. It really depends on the depth of a lender’s pockets and its faith in your business.
In the case of invoice finance or trade finance, you will be expected to repay the funds as soon as your customer pays the invoice which has been funded – up to 90 days in some instances.
Business loans and lines of credit can range from a few months to 5 years. Seldom more.
Unsecured business loans are more expensive than secured loans because lenders think the risk of loss is greater.
Business loans, can run between 11% p.a. and 25% p.a. The loan will cost more, if your business is struggling.
The cost of invoice finance varies depending on whether you are asking the lender to fund your entire debtors’ ledger or just buy a single invoice.
You can expect to sacrifice at least 3% to 5% of the invoice value if it is a single invoice transaction.
A full ledger facility could require a discount of between .5% – 1.5% of the invoice value. However, set up fees and on-going account fees will increase your costs and be levied for the entire period of your contract – at lease 12 months.
A business line of credit will provide you with a credit limit which you can draw upon at will. You will be charged interest only on the money you use and rates will be around the 12% p.a. mark. Of course, once you hit the credit limit you can not access more cash until you have repaid the account.
Most, but not all, lenders will charge you application fees which can vary between 1% and 2% of the amount you are borrowing. Some lenders will also charge fees for account administration.
Why you would choose an unsecured business loan
- No or limited collateral required
- Less risk. Your home is not on the line.
- Approval can be a lot quicker than traditional secured finance.
- Non-bank lenders actively pursue good quality small businesses (as opposed to the banks)
- Your borrowing capacity reflects your sales – in the case of invoice and trade finance.
- Lending criteria tends to be flexible.
Why you wouldn’t choose an unsecured business loan
- Cost. You will pay more for unsecured borrowing.
- Higher fees.
- Lower Amounts. Lenders price for risk. If your business is viewed as high risk your borrowing capacity will be lowered.
- Shorter repayment terms.
How do I qualify for an unsecured business loan?
Lenders, look at a few main things to assess the risk and your ability to repay. The list may include all or some of the following:
- Your credit history and credit score
- How long you have been in business
- Cash flow and business model
- Financial reports
- Transaction history
- Bank accounts
Why would you need an unsecured business loan?
This type of loan is particularly suitable to small businesses and start-ups which have identified new business opportunities, or are experiencing rapid growth and need fast and relatively easy access to funds to underpin the momentum.
It can be a fantastic way to exploit a time-limited opportunity that will bring a strong return and help your business to grow.
A good way to judge the value of any loan is to compare the cost with the expected return.
If your interest rate is 15% p.a. you would want to know that your return during the next 12 months would be a lot more than that.
Remember, you have to pay the interest, repay the balance and achieve growth.
Looking for more information? Don’t hesitate to browse the loan category section on our homepage other business loan options. Or complete our contact form below.