- Unsecured loans don’t require assets like property, making them ideal for businesses without valuable collateral.
- These loans often come with higher interest rates and shorter terms due to the increased risk for lenders.
- Unsecured loans can be used for various business needs, such as improving cash flow, purchasing equipment, or expanding operations.
When cash flow is tight or a shiny new gadget is on the wishlist, many small businesses wonder whether they’ll be approved for finance.
Most business loans require collateral, meaning that if you default, your lender will take the asset you offered up and use it to cover any losses incurred.
But what if you don’t have assets on hand?
After all, not every small business has the luxury of working in their own office space or with their own equipment. These things take time, and you have to start somewhere.
That’s where unsecured business loans come in. Let’s look at how they work, and more importantly, how they could help boost your business.
What are unsecured business loans?
An unsecured business loan works much like any other business loan, except you don’t need to provide collateral as security.
Instead, lenders assess your financial reliability based on factors such as:
- Credit score. A good credit score shows you’re likely to repay on time, increasing your chances of approval.
- Income and cash flow. Lenders want to see that you have enough consistent cash flow to meet repayments without relying on assets.
- Debt-to-income ratio (DTI). A high DTI means a lot of your income is going towards existing debt, which can be a red flag.
- Repayment history. On-time payments for loans, credit cards, or bills all indicate reliability.
- Business stability. The longer you’ve been operating and the more consistent your financial performance, the better.
- Financial paperwork. Think bank statements, tax returns, BAS, and profit & loss statements.
Common uses for an unsecured business loan
One of the best things about unsecured finance is its flexibility. It can be used for any business-related needs, such as:
- Improving cash flow
- Buying new property or assets
- Renovating your working space
- Upgrading tech or other equipment
- Purchasing inventory
- Expanding your product offering
- Optimising operations to improve productivity
- Covering day-to-day operational costs
- Creating and optimising marketing campaigns
- Building out a new website
- Hiring new staff or training existing employees
How much can you borrow for an unsecured loan?
Your borrowing power will depend on factors like your credit history, revenue, time in business, loan purpose, and the lender's policy. With Valiant, though, you can access unsecured finance of $5,000 to $500,000+.
Is unsecured business finance right for your business?
Unsecured lending may not be the right choice for every business, so it's important to carefully consider both the benefits and the drawbacks
The pros
- No collateral required. The biggest perk of unsecured finance is that it doesn't require security. This makes it more accessible to business owners who may not have valuable assets to offer (yet).
- Clear repayment terms. Unsecured loans often come with fixed interest rates and set repayment schedules, so it’s easier to budget for payments.
- Minimal paperwork. Since there is no need to appraise collateral, applying for an unsecured loan generally requires less documentation.
- Flexible use. Unsecured finance can be used for a wide range of business needs, from buying equipment to covering day-to-day expenses.
- Fast approval and funding. Since there's minimal paperwork and no need to evaluate collateral, the approval process for unsecured finance is typically more straightforward.
The cons
- High interest rates. Lenders tend to charge higher rates to offset the increased risk of lending without collateral.
- Shorter loan terms. Unsecured loans often need to be repaid sooner, which can put pressure on your cash flow.
- May require director’s guarantee. This is a personal promise that if your business can’t repay a loan, you’re personally liable for the debt.
- Often have additional fees. Setup, monthly maintenance, and drawdown fees can add up and inflate the cost of the loan.
Can start-ups get unsecured finance?
If you’re just starting out, you might not have collateral to secure a traditional business loan. But, you may also not have the trading history and financial track record for an unsecured alternative.
It can feel like a catch‑22: you need money to grow your business, but lenders want proof that you can repay before they’ll lend.
While it’s harder to qualify for funding as a start-up, there are a few options that might suit you:
1. Look into alternative lending
Business loans from banks are traditionally harder to qualify for. By going through a non-bank or alternative lender, you cut through most of the red tape and benefit from more lenient approval criteria.
Higher interest rates are usually involved, but that’s the trade-off until you’ve grown your business, in which case you could look into refinancing your business loan.
2. Turn to family and friends
If your business idea is truly great, it shouldn’t be difficult to get friends on your side. So, why not set up a short-term finance arrangement or partner up with like-minded xxx?
You might end up finding a business partner in the process, willing to bridge gaps in your skillset for a share in your business.
3. Save as much as you can
Many small business owners get their companies off the ground with their own hard-earned dollars and assets.
If you have equity within a property, savings, or other valuable assets, you’re already off to a head start. If not, start putting money aside into a savings account while you develop your business plan.
4. Get investors onboard
Crowdfunding is another option. Connect with like-minded investors who see potential in your idea.
They’ll help you kickstart your business, and many of them will be interested in sharing their skillset as well. After all, the success of your business is in their best interest.
Tips for a successful unsecured loan application
If you're ready to apply for unsecured finance, here's what you can do for the best shot at approval:
- Get your credit score where it needs to be. This takes time but paying off old debt, avoiding missing repayments, and making sure your personal finances are healthy can all help.
- Start small. Paying off a personal credit card can build trust and instill confidence in lenders while giving your credit score a boost.
- Make repayments on time. Woo your lender with a great track record of managing personal finances. This proves you’re responsible and increases your creditworthiness.
- Get paperwork together ahead of time. Lenders will ask to see your financials, including your balance sheet and bank statements, so make sure you have it all ready.
Ready to apply for business finance?
If you're considering a business loan but aren’t sure where to start, Valiant can guide you through the process.
We help Australian SMEs (20k and counting!) access flexible loans tailored to your needs, and getting started couldn’t be easier: just tell us what you need, and we’ll handle the approval from beginning to end, so you can focus on growing your business. Get a quote today.
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