Should I Use Unsecured Business Loans In Australia?

As an SME, receiving the capital you need to grow your business can be one of the biggest challenges you’re likely to face. The process is notorious for being lengthy and cumbersome, with banks often reluctant to extend finance to small businesses without real estate as collateral. For many entrepreneurs, this immediately limits the number of financing options that are open to them. Understanding this frustration and identifying a gap in the market, recent years have seen a surge in the number of innovative online lenders focused on unsecured small business loans and improving the lending cycle for small business. 

However, just because access to unsecured finance is improving, it doesn’t necessarily mean it’s the best funding option for your business. Understanding the pros and cons as well as the alternative financing solutions available on the market is important, so you can decide on what’s best to take your business forward.

Why Look for Unsecured Business Loans?

For many businesses, particularly those with younger owners, they simply may not own real estate, or hold sufficient equity within their real estate to secure a business loan for the amount they desire. Even more established businesses can find it difficult to access additional finance once they have pledged their real estate as collateral on existing credit facilities. In these scenarios, sometimes the only option is to seek unsecured finance from a lender with less rigorous criteria than a bank.

Unsecured small business loans can also be used for virtually any business purpose. In this sense they’re like a business overdraft – it’s down to you as the business owner how you would like to spend the funding. It’s not like vehicle or equipment finance where the proceeds of the loan have to be used to purchase a specific asset.

If speed is paramount, then unsecured business loans issued through online lenders are, by quite some distance, the fastest form of business finance you can expect to receive in the market today. It’s here where non-bank fintech lenders really come into their own.

Right now, quick business loans simply aren’t possible through a bank. Obtaining finance from a bank can be both tedious and torturous. Limited information is available to help you decipher the best lending product, large amounts of company information and documentation are required, and once you’ve submitted your application it goes into a black hole for a couple of months. You’re then left waiting for such a period of time, your business financing requirements may have even changed.

When applying with an online lender, quick business loans are the norm. Within 10 minutes, you can have an application sent off and expect a yes/no response within the next 24 hours. Each lender sets its own lending criteria but a general rule of thumb is that for small business loans under $100,000 company financials are not required. Applicants are only required to provide a recent copy of their bank statements – something which can even be synced online with the click of a few buttons and requires no manual intervention. Once a loan is agreed, funds are disbursed into the borrowers account within another 24 hours – meaning the whole process is completed in a maximum of 48 hours. You only have to look at client feedback to see borrowers who have had loans approved and funds received on the same day they apply.

Finally of course, if for whatever reason you find yourself unable to repay the loan, it also means you aren’t risking the loss of your personal or commercial real estate, or a key asset to your business. 

To summarise, unsecured business loans can be useful when:

  • You have a business opportunity which requires you to move quickly.
  • You want to use the funding for a variety of business purposes.
  • You simply aren’t able to provide any collateral to secure a loan.
  • You’re unable to meet the stringent criteria to qualify for a bank loan.
  • You encounter short term cash flow difficulties you need to cover.

What Should I Be Aware of When Taking Out An Unsecured Business Loan?

According to data by the Reserve Bank of Australia, small businesses loans have a higher default rate than both large business loans and private mortgages. By historical evidence then, small business lending has a relatively higher risk when compared to other forms of lending. Banks look to mitigate this increased risk with property collateral, whilst non-bank fintech lenders account for this risk within their pricing. Thus, unsecured small business loans are always likely to attract higher interest rates – you can expect to pay double digit upwards and don’t be surprised if they’re in line with the interest rates on your credit card.

Unsecured business loans are typically used as short-term stop gaps to manage cash flow difficulties. It’s quite common, therefore, for these short-term loans to be presented as a factor rate or a total payback amount that is agreed at the onset of the loan. On a standard business term loan, an annual interest rate is agreed which is applied to the outstanding balance on the loan. So as you make repayments, the interest you accrue will decrease. Factor rate loans, or loans where a total payback amount is agreed at the onset of the loan, can therefore usually attract a higher APR. 

It’s not always the case though and business finance can see borrowers incur many different types of fees depending on the product they choose. These can include; origination fees, annual renewal fees and valuation fees (for secured loans). Using a business loan calculator, which allows you to input all relevant fees, is your best bet for comparing the APR on a small business loan and making a genuine like-for-like comparison on costs. Short-term unsecured business loans can also have a daily, weekly or monthly repayment schedule, with fees accrued if you miss your repayments. So be sure that you’re only signing up to a repayment schedule you know you can keep up with.

It’s also worth noting, depending on the amount you’re looking to borrow (usually above $100,000), a personal guarantee can be required, meaning you are personally liable for repayment if your business is unable to uphold the terms of your loan agreement. In this sense, you have the benefit that you haven’t used personal real estate as collateral to secure the loan, but you could find yourself making repayments on a failed business loan for years to come.

When taking unsecured business loans be sure to:

  • Understand the total costs of the loan.
  • Only accept a repayment schedule that suits the cash flow of your business.
  • Be aware you may still need to provide a personal guarantee.

Consider Your Financing Options

Whether you simply aren’t comfortable using real estate to secure a small business loan or you don’t have property to secure a loan, there are still a variety of both unsecured and secured financing options you should consider.

Loan Type Overview Secured? Considerations
Business Loans Straight-forward lump sum cash injection to your business, agree to the repayment plan at the onset. Secured or Unsecured Effective form of financing when you know exactly how much you require and can stick to the repayment schedule.
Line of Credit Pre-agreed credit facility where you only draw on the funds you require.  Secured or Unsecured Could incur annual and non-utilisation fees. Usually higher interest than term loans.
Business Overdraft Linked to transaction account, allowing negative balances below $0. Generally Unsecured Usually only suitable for day-to-day cash flow shortages. Not suitable for large investments.
Business Credit Cards Suitable for online and card terminal purchases. Generally Unsecured Cash transfers are very expensive, only real use is for lower-value card purchases.
Asset Finance Secure the loan with the asset you’re looking to purchase, includes equipment finance and vehicle finance. Secured If unable to repay the loan you could lose the asset your business has purchased.
Invoice Finance Raise cash on the unpaid invoices owed to your business. Often suitable for small businesses who have large business customers who regularly pay invoices late. ‘Secured’ by invoices owed to your business. If your customer fails to repay the invoice, you could be liable to pay your invoice finance lender. Lender may prefer to manage the account receivables process.
Merchant Cash Advance Borrow money based on future card sales – a good choice for retail/online businesses with little assets to secure a loan. ‘Secured’ by future card sales. Lending purely based on card transaction volumes and not company accounts and financial statements.

Businesses can benefit from having a number of lending solutions and reducing the dependence on just one lender. Often, it’s a blend of funding solutions that can provide businesses with the ideal capital sources they need to grow their business or survive a downturn in cash flow. A line of credit for example, which can also be issued on an unsecured basis, is usually reviewed annually – meaning business owners know they have access to funds whenever they need throughout the year and are not at the mercy of a yes/no decision each time they apply for a small business loan (whether secured or unsecured).

If you’re unable to provide property as collateral for a loan, you should not immediately dismiss secured lending either. There are a variety of solutions that allow you to borrow against a business asset or even outstanding invoices that could still be relevant to your business.

So When To Use Unsecured Business Loans?

Generally, if you have a short term cash flow deficiency and need a business loan quickly, then unsecured business loans are going to be an option you want to consider. It’s unlikely that as a small business you’ll qualify for an unsecured business loan with a bank but unsecured business loans with innovative non-bank lenders are still possible. These lenders are generally better at understanding the issues small businesses face and issuing small business loans is their area of expertise – they offer no other banking services outside of SME finance. It’s for this reason they understand the importance of making a lending decision quickly, so whether you’re successful or not you should hear back within 24 hours of your application being submitted.