Is your bad credit score a turn-off to lenders in Australia? If YES, here are 10 best sources of unsecured small business loans with no personal guarantee in Australia and their interest rate.
Unsecured business loans provide you with the platform to borrow money for your business without the need for collateral. Unlike secured loans that request you to borrow against an asset such as a vehicle or property, unsecured loans aren’t guaranteed.
What Kind of Businesses Qualify for Unsecured Business Loans in Australia?
Due to not requiring any collateral, unsecured loan applications are often assessed on the basis of business cash flows and the borrower’s creditworthiness. It simply means that for an unsecured business loan, the financial health of your business and your credit score will have a bigger impact on whether your application gets approved or rejected.
Note that these business loans are short-term by nature. It all depends on the lender, unsecured business loans can be provided for anywhere from 3 months to 3 years, but, some peer-to-business lenders can provide an unsecured business loan for up to 5 years.
Have it in mind that one of the major features of an unsecured business loan is that it does not require any collateral; i.e. no one can make a claim on an asset of the business if repayments can’t be made.
This makes the loan more risky when compared to a secured business loan and as a result, lenders will charge a higher interest rate and provide the funds at a shorter amount of time. These kind of loans can be used to finance any business-related costs. It gives you the flexibility to smoothen your cash flow, purchase equipment, and access funds quickly.
Advantages Of Unsecured Business Loans
This type of loan allows your business to have faster access to cash compared to other business loan products and is a wonderful alternative if you do not want to use your personal or business assets as collateral. Note that if your business defaults on an unsecured business loan, the lender won’t be able to seize any of your personal or business assets like they would if you defaulted on a secured business loan.
But there’s an exception to this especially if you have provided a director’s guarantee as a part of the unsecured business loan. If this is the case, then your business assets will still be safe, but you will be personally financially liable for covering any default made by the business.
- The application process for unsecured loans are fast and simple. It is quite easy to apply for an unsecured business loan because no security is required. You do not have to itemize your assets and the lender does not have to value that collateral. You can apply for an unsecured loan online, usually in just a few minutes, and the turnaround time is much faster than a secured loan.
- Unsecured loans give businesses who do not meet the bank’s rigorous lending criteria the opportunity to access financing. Even if you do have property to present as collateral, you may still be able to find funding via an unsecured loan.
- If you are unable to repay a secured loan, lenders are able to seize the business assets that were used to secure the loan. Comparatively, unsecured loans do not put your assets at risk. If for some reason you go bankrupt, unsecured loans can be discharged.
- Successfully paying off your unsecured loan will help to build your credit history, improve your business credit score and make it easier to obtain a loan in future.
- There is less paperwork required and less to evaluate, so they have a much faster turnaround time. A straight-forward unsecured loan application can be approved in as little as 2 hours with same day turnarounds and settlements up to 24-48 hours.
- Approval of an unsecured loan shows a high level of trust between you and the lender. It requires that the lender trust you and your business. Once you have paid it back, it can lead to an even higher level of confidence, easier access to finance, and potentially better terms.
- Secured loans are typically constrained by the value of the property or asset being used as collateral. Unsecured loans, however, are dependent on your business credit score and cash flow.
Disadvantages Of An Unsecured Business Loan
Since collateral are not required, unsecured business loans are without doubt a riskier type of loan to give to lenders. Have it in mind that to compensate them for the additional risk of default relative to a secured term loan, unsecured loan lenders will often charge a higher interest rate and provide the loan for a shorter time period.
Note that when applying for an unsecured business loan, the cash flow, health and creditworthiness of your business will have a much bigger impact on the approval of your application. Lenders will majorly focus on the bank statements of the business, assessing inflows and outflows, conduct and existing commitments, to determine an amount they are able to comfortably lend whilst leaving some surplus.
- Unsecured loans are higher risk for lenders than secured loans, and as such the interest rates are often higher. You will likely pay more for an unsecured loan over the long term, depending on the quality of your credit score.
- To mitigate risk, some lenders will reduce the amount that they are willing to lend without security. This results in lower loan amounts being offered to business owners.
- Some lenders require a tighter repayment schedule to reduce their risk. This can mean you don’t have access to funds and it can be difficult to extend your loan terms.
- While an unsecured loan does not require you to put down assets or property, this doesn’t leave you completely off the hook as many lenders may require that you provide a personal guarantee. This means that you will be held personally responsible for repayment of the loan if your business cannot afford to pay back the loan.
- The high-risk nature of unsecured loans means lenders can be stricter with their lending criteria. This means that if you have a poor personal or business credit score or no credit history at all, you may find that you don’t qualify for funding.
- Lenders want to dissuade their borrowers from paying back their loan balance too quickly. They do not want to lose out on the potential interest that will be gathered for the duration of the loan repayment period. To deter borrowers from paying back their loan immediately, they may charge additional fees or have a minimum stay-in period.
10 Best Sources of Unsecured Business Loans in Australia With No Personal Guarantee and Their Interest Rates
The key difference between a secured and an unsecured business loan is that a secured loan requires that you have assets that you are willing to put down as collateral against your loan. An unsecured loan does not require that you borrow against an asset or property. Secured loans are more commonly offered by banks. They provide businesses with access to larger loan amounts than unsecured loans because they are lower risk for lenders.
Unsecured business loans do not require you to put up assets as collateral. They are usually smaller in value and have higher rates than secured loans due to the risk to lenders. Below are the Best Sources of Unsecured Business Loans in Australia;
- Line of credit
Here, the agreed amount is made available for you to access at any time you need it. Often with a line of credit, you will only pay interest on the drawn down amount, not the whole facility.
- 5.07% – 12.45%
- Extremely flexible – draw and repay funds as you need them
- No minimum amount – only borrow and pay interest on what you need – usually calculated daily
- Quick and simple application process
- No long-term certainty – can be cancelled at any time and is repayable on demand
- Terms vary and you may be required to pay off the overdraft at specified intervals
- Likely to incur fees even if not used
- Invoice Finance
Invoice finance also known as “factoring” is when you sell your invoices to a lender. The lender will forward you up to 80% immediately of the invoiced amount and become responsible for collecting payment.
- 3% – 5%
- Immediate injection of cash – no need to wait for payment of invoices
- Removes the risk of late or non payment of invoices
- Can be used to cover short term finance issues
- You receive less than the face value of the invoice
- Usually more expensive than loan finance
- Many lenders have minimum turnover requirements – may not be available to new businesses without an established sales history
- Merchant Cash Advance
Here a lender will provide you with a lump sum payment in advance and then collect repayment (and their fees) as an agreed percentage from your daily sales.
- Usually ~20%
- Quick and easy online application process
- Immediate cash injection – funds usually available within days
- Repayments directly linked to cash flow – no fixed interest payments or repayment schedule, with repayments made as an agreed percentage of sales
- Only available to ‘merchant’ businesses making daily debit or credit card sales e.g. retailers, restaurants
- History of achieving a minimum average level of sales may be required
- Often considerably more expensive than other financing options with rates as high as 60% –200% APR
- No government regulation on lenders, so terms and conditions can be complex and restrictive
- Equipment Finance
Equipment finance is a fixed term loan product to purchase machinery or equipment for your business. The asset will be owned by the Lender throughout the term of the contract.
- 6% – 15%
- Small or no deposit or up-front payments, minimizing the initial impact on working capital
- Flexibility to set a repayment plan to suit your cash flow, usually over a term of up to five years
- Quicker and easier to secure than loan financing You may be able to claim GST credits for GST included in the lease charges
- Higher interest rates and costs than loan financing
- No equity built up in the asset – you do not own the equipment the end of the contract
- Lease contracts usually have substantial early-termination fees so you’re locked in even if you no longer need the equipment
- Hire Purchase
A medium term loan product to purchase an asset. The asset is owned by the Lender until the end of the finance term.
- 4.6% – 15%
- Flexibility to tailor your repayment made to suit your cash flow needs and match the life cycle of the asset
- You own the asset at the end of the contract and can continue to use or dispose of it as you wish
- You may be able to claim GST credits for GST included in the purchase charges
- Unlike leasing you will need to pay a deposit, which will impact your working capital
- Higher interest rates and costs than loan financing
- You do not own the asset until the end of the contract
- Commercial Bill of Exchange
This business finance can be provided over a range of terms, usually to help with seasonal shortfalls in working capital.
- 1.7% – 1.75%
- A short-term facility with the option to roll-over at each maturity date
- Can be used as a revolving line of credit (draw down funds as you need them) or a term loan with the principle reducing at each rollover
- Interest is payable on maturity – terms vary with maturity at agreed intervals (eg. 30, 60, 90, 120, 150 or 180 days) and the potential for periods of fixed interest.
- Interest is payable in advance and includes a margin above standard rates
- Variable rate bills are very sensitive to fluctuations in interest rates
- High minimum borrowing amounts (often $500,000) – only suitable for established businesses with high turnover
- Personal Loans
Your typical personal finance fixed term loan, fixed or variable interest rate loan.
- 7.75% – 19.09%
- More economical than leasing or hire purchase for buying equipment and machinery
- Can usually be repaid early without penalty
- Repayable in installments, spreading the cost of equipment purchase
- Availability and amount will depend on your personal credit rating
- Personal (not business) responsibility for repayments
- Usually higher interest rates than other business loans
- Business Credit Card
As per your standard credit card, a company credit card will often been securitised against the business owners.
- 5.88% – 20.95%
- Convenience – very easy to make purchases
- Flexible source of emergency cash flow
- Interest-free periods on some cards make them an economic short-term purchasing tool
- May be linked to your personal rather than business finances
- Interest rates can be very high
- Can incur considerable fees and charges even when not used
For you to get your application approved for an unsecured business loan, lenders will have to be comfortable that your business will be able to support any required loan repayments. They will have to assess the stability and risk of your business, they will often require you to provide a combination of the documents listed below as part of an application for an unsecured business loan:
- Business financial statements
- Business tax returns & statements
- Business bank account statements
Also note that as part of the application for an unsecured business loan, you may be asked to provide a ‘director’s guarantee’. It doesn’t mean that you need an external guarantor, but you – as a director – are ‘guaranteeing’ that the loan will be paid back and that if the loan can’t be paid back and goes into default, that you will be personally financially liable for the repayments.
This could potentially involve the lender seizing personal assets to recover the value of the loan. Indeed an unsecured business loan can be used for a myriad of business expenses. Whatever it is that you need for your business, an unsecured loan can help you finance it.
But because of the short life-span of an unsecured business loan, they are best suited to helping short-term working capital needs rather than funding large, lengthy business projects. These loans can also provide a great quick cash-boost to allow you to take advantage of and explore potential growth opportunities for your business.