Unsecured business lending: Are you eligible?

Unsecured finance can be a great solution if you’re a startup or small business owner looking for funding without access to large assets for collateral. But can any business access it? Read on for everything you should know about unsecured business loan eligibility.

12 factors that influence eligibility for unsecured finance

Factors that lenders look at when deciding whether to offer you financing include:

1. Your credit score

Your personal and business credit history play a significant role in determining whether lenders will approve your finance application. With a poor credit score, it’s unlikely you’ll be able to obtain finance. A great credit score backed by a history of responsible borrowing gives your lender confidence in your ability to make timely repayments.

Your credit score may also determine your interest rate. The higher your score, the lower your interest rate may turn out.

2. Your time trading

The longer you’ve been trading, the more reliable you are, assuming you have a positive reputation. If you’ve been around a long time, doing great things for your community, your track record has already done wonders in helping to get an application over the line.

3. Your position with the ATO

Consider how much ATO debt you have in relation to your annual turnover. If BAS lodgements are behind and your debt is high in relation to your turnover, you may have trouble receiving finance approval for your business. Your ATO debt should not exceed 8-10% of your turnover.

4. Property ownership

You may not want to put your assets on the line upfront, but regardless, owning a property is favourable in the eyes of a lender. For a large amount of cash, property ownership becomes even more important.

5. Your balance sheet

Your lender will want to view your financials, including your balance sheet, particularly when assessing eligibility for full-doc business loans or larger loan amounts. If your net assets are negative, this makes your business insolvent. If you tried to sell your business, it would not hold any value.

6. Your repayment history

Not only do lenders look at your credit score, but also overall borrowing habits to determine how reliable you are with finances. They’ll review your ongoing commitments and repayment history to make sure you’re able to successfully manage finances and make repayments on time and in full.

7. Your cash flow trends

Lenders will look at your cash flow trend, which ideally will be positive or consistent depending on your business (for instance, a seasonal business may have inconsistent cash flow, which isn’t necessarily problematic).

If you display a negative cash flow trend, your lender may not approve your finance application, or at best, lend to you conservatively.

8. Spread of income sources

This factor is particularly relevant to B2B businesses. Let’s say you have three clients but lose one. Assuming each client paid you the same amount, you’ve now lost one-third of your usual income.

Lenders understand that a business with few clients means a single loss can cause significant damage. If you had 20 clients, on the other hand, losing one wouldn't create such an impact. Lenders prefer a wide spread of income sources to mitigate these uncontrollable and unforeseen circumstances.

9. Month-on-month sales consistency

Are your sales consistent over time? Consistency and reliability are two major green flags lenders look for when deciding whether to offer you finance. If you can prove that your business is producing a consistent number of sales each month, you’ll increase your chances of an approval.

10. Your industry

The industry in which your business operates is another factor that determines the outcome of your finance application. Some industries simply perform better than others. For example, businesses within certain industries have a regular income coming in throughout the year, while others are seasonal in nature, like ski resorts, food trucks, and Christmas retailers.

11. Deposits per month

Many lenders prefer, or sometimes require, four deposits per month to approve your finance application. The less ‘lumpy’ your income, the better.

12. Average cash balance in account

Lenders will look at the average figure in your bank account and make sure that it exceeds your scheduled direct debits.

‘Green flags’ in unsecured loan applications

Without collateral, lenders are dealing with a whole new kettle of fish. In addition to considering the factors above, lenders love seeing:

• More than one director or shareholder guarantee.
• Property-backed guarantees, especially in unprecedented economic times.

These ‘green flags’ further help to mitigate the risk involved in lending to you without security.

How do I prove my business is profitable?

It doesn’t necessarily matter how profitable your business is to get approved for finance. Think about it from a lender’s point of view: as long as you’re meeting your repayment commitments, they can make it work, particularly for non-bank lenders.

In saying that, your ability to run a profitable business can put you in a favourable light, regardless of whether that changes your ability to qualify for finance.

With a low-doc loan, only bank statements are assessed for eligibility, and on occasion, your BAS. So, in these cases, approval will be based on cash flow and your ability to make timely repayments.

On the other hand, applying for larger loans will not only require bank statements but other financials as well, including your profit and loss statement (P&L) and balance sheet.

Improving the health of your credit score (if it’s not already where it needs to be) is the most important thing you can do to increase your chances of unsecured finance approval. Showing that you’ve been able to make timely repayments in the past is key. After all, past habits are great predictors of future behaviours.

Why are unsecured business loans declined?

Specifically, unsecured business loans are declined for the following reasons:

Your credit score is too low

Depending on your credit reporting agency, your score will fall between -200 or zero and 1000 to 1200. Your score is calculated based on your past financial history as a borrower, meaning recent credit or loan applications and whether you’ve made repayments on time. So, what’s a good credit score?

Equifax

• Excellent: 833 - 1200
• Poor: 0 - 509

Illion

• Excellent: 800 - 1000
• Poor: 0 - 509

Experian

• Excellent: 800 - 1000
• Poor: 0 - 299

If your credit score is considered poor, bank and premium non-bank lenders may not approve your unsecured finance application.

Having anything adverse on your credit file (personal or business), such as a court judgement or default, will likely lead to a declined application.

You’ve been trading for less than six months

Lenders like to see that you’ve been trading for more than 24 months, and anything below this limits your options or leads to a decline altogether. If you’ve been trading for less than six months, it will be challenging to get your application over the line.

Why? Your track record is limited, which makes your business’s potential unclear. No matter how much planning and roadmapping you do, it can be hard to judge a business’ success as an owner, let alone a lender. Every business comes with some level of risk.

Your ATO debt is too high

Every business has debt, but too much will turn your lender away. It shows that you’re potentially having trouble managing your business’ finances, making repayments, or keeping your business afloat.

Your debt service coverage ratio is missing the mark

Using bank statements, a lender will verify your business’ income, financial commitments (such as other loans), and fixed costs (such as rent and wages). They’ll then apply an industry margin to your business’ current financial state to see what surplus is left over. This helps them determine whether you’ll be able to service your new loan.

If your lender has any reservations about your ability to service the loan, they may hold back from assisting you until you’ve reduced costs and debt, or improved your business’ financial health overall.

As you can see, unsecured finance can be difficult to qualify for, but for some businesses, it can work wonderfully. Need cash now? We can organise unsecured finance for you in as little as 24 hours. Simply get in touch with a lending expert, and we’ll confirm your eligibility before finding you a great rate.

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