As a small business owner, you will likely need additional financing to cover startup costs, hire more employees, purchase additional inventory, or meet some other monetary need. Unsecured business loans in Australia is key for small businesses here in Australia.

According to the 2019 Small Business Profile released by the US Small Business Administration Office of Defense, US lending institutions issued approximately 6.1 million loans worth less than $ 100,000 to small businesses. Similarly, the 2018 Federal Reserve Small Business Credit Survey estimated that approximately 71% of the 12,000 small businesses surveyed sought $ 100,000 or less in financing, with loans or lines of credit being the most common form of financing. 

Lenders typically offer two main types of financing: secured loans and unsecured loans. But what type of loan is right for your business? Understanding the key differences between the two could be the difference between a safe cash infusion and a costly financial miscalculation. Meanwhile, if you need an unsecured business loan in Australia, you can reach out to us at Fincue. We’ll get you unsecured business loan to make your business thrive with all ease in Australia 

What is an unsecured business loans?

The biggest difference between secured and unsecured business loans is that the latter does not require the borrower to provide any collateral against the amount he is borrowing. In fact, Jeff Fazio, TD Bank’s director of small business specialists, said that this type of loan is “strictly backed by the creditworthiness of the borrower.”

“Small businesses typically seek an unsecured loan when they cannot qualify for a traditional loan or cannot negotiate better payment terms with another lender,” Fazio said. “The personal guarantee terms outlined in unsecured loans can be very generous to borrowers, but any default can have long-term ramifications that outweigh the benefits, such as negative effects on your business credit score.”

Because an unsecured business loan is better for the borrower, the lender generally charges much higher interest rates than they would on a loan backed by collateral. As a result, this type of loan is also much more difficult to obtain. The inherent risk involved in an unsecured business loan naturally means that it will generally be offered as a short-term loan to alleviate risk for the lender. 

To qualify for an unsecured business loan, Fazio says, your small business must be able to “show the lender a good credit rating, a strong financial history, and a cash flow forecast.” He noted that it is rare for a traditional lender to approve an unsecured loan, as most of those types of loan agreements come from online lenders.

Benefits of Unsecured Business Loans

If your business has enough financial goodwill in the form of a strong credit score and can afford the interest rates, getting an unsecured business loan has some benefits.z

The first and most obvious advantage is that you do not need collateral. Lenders typically want borrowers to place valuable items such as real estate, vehicles, or intangible assets such as investment portfolios and trademarks as collateral for the loan. Without the need to put those items at risk of seizure by the lender, you can rest easy knowing that you won’t lose them if something goes wrong.

Ultimately, however, the lender can seize the items if they are included in the personal guarantee that every lender must sign in order to obtain an unsecured business loan. After all, such an agreement is legally binding.

Unsecured business loans generally require less paperwork, skip the appraisal process for any collateral, and therefore have a faster process overall. Unsecured business loans are also written off in the event that your business files for bankruptcy, which is not the case with secured business loans.

Risks Associated With Unsecured Small Business Loans

While the benefits may seem valuable, there are some important caveats to consider when looking to obtain an unsecured business loan. First of all, you may not even qualify for one.

Banks rely heavily on your personal or business credit score to determine whether they are willing to offer you any type of loan, but given the high-risk nature of unsecured business loans, the bar is much higher. While there is no minimum credit score you need for a short-term business loan like this, a lower credit score tells the lender that you may have a harder time repaying the loan.

If your personal credit is not good, your business has a less than stellar credit history, or your bad credit prevents you from obtaining a credit card, let alone any other type of cash advance, your loan application will likely fall short. anyway, any additional business financing opportunities. It will always be more difficult to borrow money if you are having trouble making your monthly payments.

If your business requires a large amount of funds, you may not be able to get as much as you need through an unsecured loan, which generally only offers smaller amounts. Again, because there is no collateral to back the loan, banks are less inclined to take risks and provide large sums of money. 

Also, an unsecured business loan may not be right for you simply because of the significantly higher interest rates for this type of loan. Rates are almost always higher than some of the major credit cards, and some lenders charge a 100% APR. How high that number is depends on your credit score.

“Since a lender takes a higher risk by making an unsecured loan, the interest rates are high for borrowers,” Fazio said. “With unsecured business loans, we often find that the borrower may default and not have the means to repay the loan.”

This brings us to the biggest caveat, which should really apply to any loan you may be considering: defaulting on an unsecured loan spells big trouble for you and your business. Even if you don’t offer any collateral, which minimizes risk to the lender, there are other ways that defaulting on your loan could cause you significant financial problems.

If you default on an unsecured business loan, your personal and business credit score will suffer significantly. Also, just because you have not provided a specific guarantee does not mean that you will not lose any assets. The lender can sue you and your business not only for the loan balance, but also for interest and other costs. Your business bank accounts can be garnished, liens can be placed on your business assets, and all of that can happen in months.

Are you in a need of Unsecured Business Loan for your Business in Australia? Reach out to us at Fincue today.