Business growth often requires some debt. This could mean expanding to new premises, hiring staff, investing in new stock or being able to better manage your cash flow. At some stage, Australian business owners will seek funding from banks or alternative lenders in order to take their business to the next level.
It’s important to understand the distinctions between a secured loan; one that is backed by collateral such as property, and an unsecured loan which is not. Applying for an unsecured business loan will not require you to tie your personal property to the loan itself. However, you still need to meet income and credit requirements, and many alternative lenders ask for a personal guarantee from the directors of the business.
Unsecured loans carry more risk than a secured loan, which is reflected in the interest rate. A higher interest rate reflects the higher level of risk from the lenders perspective.
74% of SME lending comes from the four major Australian banks. Even though the ‘big 4’ have a stranglehold over SMEs when it comes to business finance, it’s clear to see why the prevalence of online lenders is becoming a smarter alternative.
A recent study by East & Partners recognised the availability of unsecured credit, with no requirement to mortgage the family home, is the most important factor for SMEs seeking finance to fund growth. Furthermore, 67% of SMEs are willing to pay a higher rate to obtain finance if they don’t have to provide real estate security.
What are the advantages of unsecured business loans?
1. No risk to your home
Applying for an unsecured business loan means you do not offer your family home or personal assets as collateral. You are safe in the knowledge that whatever happens in business, your family home won’t be at risk.
2. Less stringent pre-requisites
Unsecured business loans are designed to be easy to obtain. Most lenders will consider your application if you’ve been running a business for at least 6 months, with a minimum annual turnover $50,000. Your business must be Australian owned and registered, and you must use the funds for business purposes only.
3. Fast application and approval
With the advancement of finance technology, or fintech, the speed and efficiency of financial services are being disrupted in a big way. No longer do business owners need to make appointments with their bank manager, fill out extensive paperwork and wait weeks for a decision. Alternative lenders allow you to apply online in minutes, connecting your cloud accounting software and online banking details to offer a responsible lending decision based on the health and growth potential of your business. It’s fast, paperless, and you can apply in your own time 24/7, 365 days a year. More often than not, you will receive a lending decision within 24 hours.
4. No guesswork, transparent repayment schedule
Alternative lenders are continually pushing for transparency in the industry. This means your repayments (daily, weekly, fortnightly) are spelt out up front. The interest rate is determined upon approval, and your loan schedule will reflect a regular, even repayment. This means you know exactly what you need to repay in advance; the rate or amount will not vary for the duration of your loan.
5. Credit history is not the be all end all
Again, the interest rate offered by an alternative lender is a reflection of risk the lender is taking. An unfavourable credit history is not necessarily an automatic ‘no’. It’s quite common for alternative lenders to offer loans to business owners that do not meet the bank’s requirements. What this means is, businesses with a strong credit history are offered a more competitive interest rate. Businesses with a tarnished credit history are still able to access the finance they need for growth.
6. Focus on flexibility
Unsecured business loans are flexible in more ways than one. Not only do you have the power to choose the loan amount you desire for the time you need it, some lenders allow you to repay early without penalty. At Sail, you’re able to repay the principle amount owed on the loan after the minimum 3-month term. Each lender is different so you must do your due diligence to make sure this is an option for your business. Some lenders will only let you repay after the half way point of your loan, others will charge fees or penalties to break the loan agreement. Make sure you know where you stand on early repayments before signing the dotted line.
Unsecured business loans are a tailored finance solution based on the health of your business and your ability to repay. These business loans are designed to ignite business growth, expansion, and development without putting significant strain on your business or risk to your assets and property.
It’s worth keeping in mind that unsecured loans carry a higher interest rate. You need to be confident you can pay the loan back – and quickly – and in doing so, unsecured business loans can have a hugely positive impact on your business.
Over to you…
Have you considered an unsecured business loan?
We’d love to hear about your experience in the comments below.