Unsecured Business Loans

What is an unsecured business loan?

An unsecured business loan is one that does not require an asset to be used as collateral, or to “secure” the loan. Because you’re not borrowing the money against an asset, the lender will typically assess your business’ cash flows and turnover, trading history, and creditworthiness as part of your application.

How do I apply for one?

At iSelect we’ve partnered with Valiant to make it easy for our customers to easily compare unsecured loans. Click here to begin your unsecured loan application with the friendly team at Valiant.

Should I get a fixed or variable rate unsecured loan?

The short answer is, it depends. A fixed rate unsecured loan can provide the security of knowing exactly what your repayments will look like for the term of your loan. This can provide some predictability in your business planning, and also shield you from any unexpected hikes in repayments if interest rates increase.

That said, with a variable rate loan, you open yourself up to benefit from any drops in interest rates, which could lower your repayments. However, there is no way to know for sure when and if interest rates will drop, so it comes down to both personal preference, and what’s suitable for your business.

What can an unsecured loan be used for?

Unsecured loans aren’t typically used to purchase assets, but rather to assist with your business’ working capital.

Purchasing stock & business inventory:

If you run a clothing store, you need clothes on the racks, and if you run a café, you need beans for that coffee machine. An unsecured business loan can assist with purchasing stock and inventory so that you can continue selling and keep your customers happy.

Business growth:

One of the most exciting parts of running a small business is watching it grow. However, expansion can be a capital-intensive exercise for business’s still finding their feet. Looking to expand or refurbish your workspace? Hiring new staff? Need money for a new marketing campaign? An unsecured loan could be a viable option.

Covering business expenses:

Maybe you’ve had an unexpected or one-off cost affect your business’ cashflow? An unsecured business loan could help cover this one-off cost, without affecting your ability to run your business, continue operations, and pay staff.

Purchasing equipment:

Need a new coffee machine for your café? An unsecured loan can be used to finance the purchasing of an asset. That said, secured loans are more commonly used to finance the purchase of physical assets. A secured loan is where an asset (such as the one you’re purchasing) is used as collateral for the loan. Whether or not a secured or unsecured loan is suitable for purchasing equipment or other physical assets can depend on a range of factors, such as the kind of asset, and the loan value.

What are the benefits of an unsecured loan?

Unsecured loans can be a great option for some businesses looking for to finance their working capital. Here are some of the benefits worth considering:

• No collateral: One of the biggest benefits of an unsecured loan is that you’re not required to provide an asset as collateral for the loan. This means that the lender cannot seize your business assets if you default on the loan, and you have the flexibility to either upgrade or liquidate assets as needed.
• Speed: Applications are processed, and funds are typically available faster with an unsecured loan than a secured loan.
• Trading history: If you have a great track record as a business, positive cash flow, and a strong credit score, this can play to your favour during the application process.

What are the disadvantages?

That said, even unsecured loans have their downside. Here’s a quick summary of some of the disadvantages worth considering:

• Higher interest rate: Because unsecured loans aren’t secured with an asset, they are viewed as riskier by lenders. For this reason, they can come with higher interest rates than secured loans.
• Smaller loan terms & value: Unsecured loans tend to come with smaller maximum loan values, as well shorter terms in which you’re required to pay the value back with interest.
• Trading history: This could be both an advantage or disadvantage depending on your business. If you’re a new business without a strong record of positive cash flow, or if your credit score isn’t particularly strong, then this could adversely affect your ability to acquire an unsecured loan.

What are some factors to consider when comparing unsecured loans?

There are a range of unsecured loan features which can differ between lenders.

• Interest rates: Different lenders will offer different interest rates, which can have a significant impact on the total amount of repayments you’re required to pay over the life of the loan.
• Loan term: Whether you’re required to pay the loan off in 2 years or 5 can have an impact on your business’ cash flows. It’s a good idea to look for a loan term that isn’t going to create undue financial stress to pay off.
• Whether the loan is fixed or variable: Fixed interest rates can provide the security of knowing exactly what your repayments will be and being able to plan accordingly. However, if interest rates drop, on a fixed rate loan you won’t benefit from this as you would on a variable rate loan. So it’s a good idea to factor this into your decision.
• Fees: Lenders can each have different fees associated with the setup and ongoing maintenance of your loan.
• Redraw facility: Some loans can come with a redraw facility, allowing you to withdraw any money from any payments you made on top of your regular loan payments. Maintaining a redraw facility can also lower your total repayments over the loan term, so this feature can be a beneficial one to have included.
• Early repayments: Some lenders give you ability to make early repayments towards the principal of your loan.

What if I need an unsecured loan fast?

Some lenders can process your loan in as little as 24 hours, getting you the funds you need, when you need them. This turnaround time can differ between lenders and loan products, so it’s a good idea to gauge which lenders typically process loans the fastest. The team at Valiant can provide guidance in this area throughout your application process.

Looking for an unsecured loan for your business? Compare from Valiant’s range of products and providers

At iSelect we’ve partnered with Valiant to make it easy for iSelect customers to find a business loan product that suits their business. Valiant compare a range of products from over 80 lenders across Australia, and can manage the process of finding and applying for your finance solution, as well as settling funds. Get started comparing online today!

Sources:
1. https://moneysmart.gov.au/glossary/unsecured-loan

Last updated: 28/01/2021