GuideToUnderstandingUnsecuredBusinessLoans
Smallandmediumenterprises(SMEs)inAustraliaplayacrucialroleinthenational economy.Theycollectivelyprovideover65%oftheprivatesectoremploymentand contributemorethan$700billiontothecountry'sGDP.However,despitetheireconomic significance,manySMEsstruggletogetloanapprovalsfromtraditionallenderslikebanksIn suchsituations,theycanrelyonalternativefinancingsourcesforbusinessloansinAustralia. SMEscanexplorenumerousloanproductsandchoosetheoptionsthatsuittheir requirements.Someofthemostpopularloanproductsfallinthecategoryofunsecured loans.Anunsecuredbusinessloanallowsafirmtosecurecollateral-freefunding,helpingit manageurgentexpensesandfuelcriticalexpansionplansLet’sdiscussthisfundingoption indetailandunderstandhowtogetthebestunsecuredbusinessloans!
(Source:https://www.pc.gov.au/research/completed/business-finance)
UnsecuredBusinessLoans:AnOverview
Anunsecuredbusinessloanisafinancingoptionthatallowsafirmtoborrowmoney withoutprovidinganycollateral.Thecollateralrepresentsanassetofferedasasecurityto thelender.Afirmmustsubmitcollateralforsecuredbusinessloans,allowingthelenderto liquidatethisassetiftheborrowerfailstorepaythemoneySinceanunsecuredloandoes notinvolvethissecurity,thelenderissuesitbasedonthefirm’sperformance,financial health,andcreditworthiness
Unsecuredsmallbusinessloansareperfectforfirmsthatrequirequickfundingorlackthe assetstoapplyforsecuredloans.Lendersoftenchargeslightlyhigherinterestrateson
unsecuredloanstocompensatefortheirrisks.However,borrowersoftenpreferunsecured financingoversecuredloanswhentheyhaveanurgentneedforcashFastunsecured businessloanscangetapprovedwithinonetothreedays,providingbusinesseswitha much-neededinfusionofcash.Firmscangetunsecuredloansforvariousbusinesspurposes. Theymayutilisetheamountforbuyinginventory,payingwages,financingrenovations,or managingtheirworkingcapitalneeds.Whiletheproportionofunsecuredloansmaybelow comparedtootherformsofSMEfinancing,theseoptionsarehighlyadvantageousfornew businessesthatrequirequickfunding.
Unsecuredbusinessloaninterestratesandothertermsvarybasedonseveralfactors Lendersconsidertheborrower'srequirements,theassociatedrisks,andtheirinternal policieswhiledeterminingtheloantermsHowever,typically,thetermsforunsecured businessfinancefallwithinthefollowingrange:
●Amount:Firmscanborrowbetween$5,000and$500,000withoutprovidingany collateral
●InterestRate:Unsecuredbusinessloanratesstartfrom5.5%perannum.
●LoanTerm:Firmscantakeanunsecuredbusinessloanforthreemonthstothree years.
●FrequencyofRepayments:Borrowerscanrepaytheloanonadaily,weekly,or fortnightlybasis
●ApprovalTime:Thepre-approvalprocesstakesbetweentwotofourhours. Additionally,theunconditionalapprovalandsettlementproceduresrequireoneto threedays.
TypesofUnsecuredBusinessLoans
SMEshaveseveraloptionstogetquickbusinessloanswithoutprovidinganysecurityThe followingarethethreeunsecuredbusinessloantypestoconsiderdependingonafirm's uniquerequirements:
●SmallBusinessLoans
UnsecuredsmallbusinessloansallowSMEstogetalumpsumamountwithouttying uptheirassets.Theapplicationandapprovalprocessesareseamlessandquick, allowingtheborrowertosecurefundingwithintwenty-fourhours.
●BusinessLineofCredit
AbusinesslineofcreditinAustraliaisaflexiblefinancingoption.Thelender approvesacreditlimitandtheborrowerwithdrawstheamounttheyneedThefirm canborrowanysumunderthelimitandpayinterestontheamounttheyutilise.An
unsecuredbusinessoverdraftfacilitycanhelpseasonalbusinessesnavigatecash flowfluctuationswithminimumriskandhassle
●InvoiceFinance
Theinvoicefinancefacilityallowsafirmtotakealoanagainsttheirunpaidinvoices.
ThelenderprovidesanadvancebasedonthevalueofpendinginvoicesThefirmcan borrowlargesumswithoutsubmittingassetslikeequipmentorproperty.
WhichBusinessesareEligibleforUnsecuredLoans?
Firmsmustmeettheeligibilitycriteriaforgettingunsecuredloans.
Thefollowingaretheminimumrequirementstoqualifyforcollateral-freesmallbusiness loans:
●ABN:ThefirmmusthaveanactiveAustralianBusinessNumber(ABN)toapplyfor collateral-freefundingInAustralia,soletradersarenotmandatedtoregisterforan ABN.However,ifyouapplyforunsecuredbusinessloansforsoletraders,havinga registeredABNisrequired.
●BusinessHistory:Theborrowermustdemonstratethatthefirmhasbeen operationalforsixmonthsorlongertogetacollateral-freeworkingcapitalloan.
●Turnover:Thefirmmusthaveamonthlyturnoverofatleast$5000.This requirementensuresthebusinessisfinanciallystableenoughtoservicerepayments consideringtypicalunsecuredbusinessloanrates.
Abusinessownermustassessiftheymeettheeligibilitycriteriabeforeapplyingforan unsecuredloan.Inaddition,theyshouldalsoconsiderifthisformoffundingissuitablefor theirbusinessTypically,thefollowingtypesofbusinessesbenefitthemostfromunsecured loans:
●Businessesthatsellhighvolumesofinventoryatsmalldollarvalues.
●Firmswithseasonalfluctuationsindemand
●Startupbusinessestradingforlessthanonetotwoyears.
●Firmsthaturgentlyrequirecash,andareopentopayinghigherinteresttosecure quickfunding.
ProsandConsofTakinganUnsecuredBusinessLoanAfirmcanleverageseveralbenefitswhentheygetanunsecuredbusinessloanHowever, theymustalsoconsidercertaindownsidesbeforedecidingtogoforcollateral-freefunding. Thefollowingarethetopadvantagesoftakinganunsecuredloan:
●NoNeedforCollateral:Unsecuredbusinessloansallowbusinessownerstoget accesstofundswithoutputtinguptheirassetsassecurity.Theycankeeptheir propertyandothervaluableassetssafenomatterwhathappensinthebusiness. Startupenterpriseswithlittletonoassetsalsobenefitfromunsecuredbusiness loans.
●QuickandSeamlessApprovalProcess:Unsecuredloansrequireminimal documentationasnocollateralisinvolved.Inmostcases,firmscangetlow-doc approvalswhentheyapplyforunsecuredbusinessloansupto$500,000The approvalprocesstakeslessthanadayformostapplicants,andaborrowercanget themoneyintheiraccountwithinonetothreedays.
●CashFlowOptimisation:Unsecuredloanscanhelpbusinessesmanagetheircash flowfluctuationsmoreefficiently.Thequickinfusionofcashallowstheborrowerto optimisetheircashflowandfulfiltheirworkingcapitalrequirementsThisaspectis especiallybeneficialforseasonalbusinessesthatexperiencealotofvariationsin theircashflow.
●FlexibilityinUseofFunds:Unsecuredloansofferflexibilityinhowyoucanutilisethe money.Unlikecertainformsofbusinesslendinglikeassetortradefinance, unsecuredloansdonothavehardandfastrulesabouttheuseoffundsBusiness ownerscanuseitforinventory,expansion,hiring,oranyotherbusinesspurpose.
●BuildingaGoodCreditHistory:Manyalternativelendersprovidecollateral-free fundingtobusinessesthatdonothavehighcreditscoresYourfirmcangetan unsecuredbusinessloanwithabadcredithistoryandfocusontimelyrepaymentsto improvetherecordsWhenyourepaytheloandiligentlyovertime,itcanhelpyou buildastrongcredithistorytogetbetterloantermsinthefuture.
Businessesshouldconsiderbothsidesofthecoinwhentheycomparebusinessloansand decideonthetypeofloantochooseThefollowingaresomepotentialissuesthat borrowersmustkeepinmindwhiletakingunsecuredloans:
●HigherInterestRates:AnunsecuredloanrepresentsahighriskforthelenderIfthe borrowerdefaultsontherepayments,thelendercannotfallbackonanycollateral torecouptheirloss.Thatiswhytheychargeahigherinterestratethatreflectsthis riskHowever,theinterestratesvarydependingontheunsecuredbusinessloan typesandthecreditworthinessoftheborrowingfirm.
●ShorterLoanTerms:Lenderstypicallywanttheirmoneybackfasterwhentheylend asumwithoutanycollateralsecurity.Thatiswhymanyunsecuredfinancingoptions comeintheformofshort-termbusinessloansGenerally,SMEscangetcollateralfreefundingforuptothreeyears.
●CapontheLoanAmount:Low-docunsecuredloansareusuallycappedat$500,000. Sinceunsecuredbusinessloanscarrymorerisk,lendersareoftenhesitantto approvesumshigherthanthiscap.However,itisnotimpossibletogetahigherloan amount.Eligiblebusinesseswithagoodcredithistorymaybeabletoborrowmore
than$500,000insomecaseswithfull-docapprovalswithformalitiesontheATO portal
HowtoChoosetheRightOptionforYourBusiness?
IfyouareabusinessownerinAustraliaseekingcollateral-freeloans,youshouldcarefully compareyouroptionsbeforeapplyingforcredit.Makingmultiplecreditinquiriescan potentiallyruinyourcreditscore.Hence,itiscrucialtobeselectiveabouttheoptionsyou exploreThefollowingtipscanhelpyousimplifytheprocessandhelpyougetabusiness loanproductthatsuitsyourneeds:
●LookforLoansTailoredtoYourRequirements:Asafirststep,youshouldascertain thebusinesspurposeforwhichyouneedaloan.Doyourequiremoneytorenovate yourbusinesspremises?Ordoyouneedacashflowbuffertonavigateseasonaldips andpeaks?Inthefirstcase,alumpsumloanmightbeasuitablechoicetofundyour renovationproject.Inthesecondscenario,anunsecuredcreditlinemayprovidea bettersolutionYourloanpurposewillhelpyounarrowdowntothebestunsecured businessloansforyouruniquerequirements.
●EvaluateYourBusinessPerformance:Lendersdetermineunsecuredbusinessloan interestratesandotherloantermsbasedonfactorslikebusinessperformanceand creditworthiness.Ifyouhavebeenoperatingforoverayearwithahighmonthly turnoverrate,youmayfinditeasiertogetlargeunsecuredloansOntheotherhand, ifyourbusinessisrelativelynewwithlimitedcashflow,thelendersmaybemore conservativewithlendingyoumoneyYoushouldaccountforthesefactorswhile choosingthemostsuitableoptionstoensureaneasierapprovalprocess.
●CheckAvailableGovernmentSchemes:BusinessownersinAustraliacancheckfor availablegovernmentschemesbeforeapplyingforloansForexample,theAustralian governmentimplementedtheSMEGuaranteeSchemetillJune2022toextendthe availabilityofcreditforSMEsinthecountry.Althoughthisschemehasexpired,you cankeepaneyeoutforunsecuredbusinessloanswithgovernmentguarantees. Government-backedloanstendtobecheaper,makingiteasierforSMEstoget fundingforgrowthAnexperiencedfinancialbrokercanhelpyoudiscoverrelevant schemesandselectthebestloanproductstofinanceyourbusiness.
●ConsultaFinanceBroker:SMEsrarelygetunsecuredloansfrombanksduetotheir strictlendingcriteria.Insuchcases,theycanapplyforcollateral-freeloanswith alternativelenders.However,manybusinessownersdonotknowwhichlendersto approachandhowtoaccesstherightloanproductsWhensuchasituationoccurs,it isbesttoconsultanexpertbroker.Afinancebrokercanevaluateyourbusiness performanceandassessyourfinancialrequirementstosuggestsuitableoptions Theycanconnectyoutotrustworthylendersandstreamlinetheprocessofchoosing andapplyingforloans.
DocumentsandProcedurestoApplyforUnsecuredLoans
Afterexploringandcomparingvariousloanproducts,youcanapplyforasuitableoption
Theproceduretoapplyforanunsecuredbusinessloantypicallyconsistsofthefollowing steps:
●FinaliseYourLoanRequirements:Aneligiblebusinessownercangetanindicative quotefromthefinancebrokertodeterminethepotentialrepaymentsforan unsecuredloanThisquotewillhelpyouascertainhowmuchyoushouldborrow, consideringyourabilitytoaffordtheinterestpayments.
●PrepareYourBusinessDocuments:Typically,SMEsmustsubmittheiridentification detailsandbankingdocumentsforthepastsixmonthswhileapplyingforlow-doc unsecuredloans.However,iftheloanamountexceeds$500,000,youmayhaveto completeformalitiesontheATOportalandsubmitadditionaldocumentsFull-doc loanapprovalsrequiredetailedfinancialstatements,ATOstatements,andbusiness activitystatements(BAS)
●SubmitYourLoanApplication:Youcanfillouttheonlineloanapplicationformand furnishtherequireddocumentsinconsultationwithyourbroker.Youcanexpectto
hearbackfromthelenderwithintwenty-fourtoseventy-twohours.Inmostcases, applicantsgettheirloanapprovalswithinoneday
●SigntheLoanAgreement:Oncethelendersharestheapproval,theborrowermust carefullychecktheloanterms.Youshouldassesstheagreementtodeterminethe interestrate,repaymentperiod,andadditionalrequirementslikeapersonal guarantee.Incaseofqueriesorconcerns,youcandiscussthemwithyourfinance brokertogetmoreclarity.Ifyouaresatisfiedwiththeloanagreement,youcansign thedocument.Oncetheagreementisfinalised,thelenderwillprovideyouwiththe borrowedsum.
Do’sandDon’tsforStreamliningYourLoanApplication
WhenapplyingforunsecuredbusinessloansforsoletradersorothertypesofSMEs,you shouldfollowcertainbestpracticesBeingcarefulwhilefinalisingyourloanapplicationcan increaseyourchancesofgettingapproved.Butbeforewedelvedeeperintothedo’sand don’ts,let’sbreakdownthecommonissuesthatcancauselenderstorejectyourloan application:
●PoorCreditHistory:AnunsecuredloanisquiteriskyforthelenderAsaresult,they maybehesitanttolendmoneytoafirmwithapoortrackrecordofmanagingcredit. Ifyourcreditscoreislow,youshouldconsultafinancebrokertoconnectyouto lenderswhoprovideunsecuredbusinessloansdespitebadcredithistory
●High-riskIndustry:Someindustriesaremorevolatilethanothers.Companies operatingintheseindustriesmayfindittoughertoraiselargeunsecuredloans Lendersassessthefirm'sperformancealongsidekeyindustrytrendstodetermine whethertoacceptorrejecttheloanapplication.
●CashFlowIssues:Businesseswithinconsistentrevenuesorlonginvoicecyclesmay struggletoservicethedebtanddefaultonrepayments.Insuchcases,lendersmay rejectloanapplicationsfromfirmswithhigh-riskcashflowproblems.
●InadequateTradingHistory:Typically,businessestradingforsixmonthsormoreare eligibleforunsecuredloans.However,somelendersmayconsideratradingperiod underoneortwoyearstobetooriskyforlendingacollateral-freesumThus, inadequatetradinghistorycanbeoneofthelikelyreasonsforgettingrejectedwhen youapplyforaloan.
●ExistingDebt:Ifyourbusinessalreadyhasalotofdebtonthebalancesheet,lenders maybemoreconservativewhentheyevaluateyourapplication.Highexistingdebtis oneofthetopreasonsforrejectingapplicationsforunsecuredloansWhenyouhave asignificantdebtburden,anewlendermaybeworriedaboutyourabilitytoservice alltheloans
Theaboveissuescangiverisetoroadblockswhenyouapplyforanunsecuredloan. However,thefollowingdo'sanddon'tscanhelpyouavoidcommonmistakesandget approvedforaloan
WhattoDoWhileApplyingforanUnsecuredBusinessLoan?
●BeTransparent:Adetailedandtransparentapplicationismorelikelytoget approvedWhenyoufurnishalltherelevantdocuments,itbecomeseasierforthe lendertogaugeyourrequirementsandassessyourintentions.
●ClarifytheLoanPurpose:Afirmcanusetheamountfromanunsecuredforanytype ofbusinessexpenseTypically,lendersdonotimposeanyrulesabouthowthefunds canbeusedaslongastheyareutilisedforlegitimatebusinesspurposes.However,a firmcanincreasethecompetitivenessofitsloanapplicationbyclarifyingthe purposeofthefunds.Theycanexplainhowtheyplantousethemoneytorun,grow, orexpandthebusiness.Thisplancanhelpconvincethelenderthattheborrowerhas alegitimatereasonforborrowingtheamount
●ImproveYourCreditScore:Lendersassesstherisklevelassociatedwithaloan applicationbyreviewingtheapplicant'scredithistoryAhighcreditscoreindicates thattheapplicantislikelytorepaytheloanwithoutdefaultingoninstalments. Hence,businesseswithgoodcreditrecordsfinditeasiertogetcollateral-freeloans. Ifyourcreditscoreispoor,youcanstillgetunsecuredbusinessloansHowever,itis advisabletofocusonincreasingyourcreditworthinesstoensureeasierapprovalsin thefuture
WhatNottoDoWhileApplyingforUnsecuredBusinessLoans?
●AvoidExcessiveBorrowing:Debtisavaluablesourceoffundingformostbusinesses However,firmsmuststriketherightbalancewhentakingnewbusinessloans. Excessiveborrowingorapplyingforasumhigherthanrequiredcanputoffpotential lenders.
●DonotSubmitMultipleApplicationswithinaShortSpan:Ifyouapplyforbusiness loanswithmultiplelendersinquicksuccession,itcanloweryourcreditscoreItis crucialtocarefullycomparelendersandsubmitwell-thought-outapplications. Indiscriminatelyapplyingfordifferentloanproductssignalstolendersthatyoudo notexercisediscretionwhileseekingcredit.Asaresult,theymayflagyour applicationinthehigh-riskcategory.
●DonotAllowRepeatedCreditChecks:Businesslendersrequestpermissionfrom firmsbeforerunninghardcreditchecks.Theycannotrunthesecheckswithoutthe borrower’sformalconsent.Toomanyhardinquirieswithinashortspancanharm yourcreditscore.Hence,youshouldbecautiousbeforeallowingmultiplecredit checks.Insteadofpermittingcreditchecks,youcangetanindicativequotefrom expertfinancebrokersTheycanhelpyougetpre-approvedwithoutanyupfront creditcheckssoyoucangetthenecessaryinformationwithoutcompromisingyour creditscore
Conclusion
UnsecuredloanscanbeinstrumentaltobusinessgrowthandexpansioninmanyAustralian SMEs.Theseloansofferincredibleflexibilitytoborrowers,providingthemwiththeleeway tofueltheirbusinesseswithouttyingupassetsYoucanexplorevariouscollateral-free fundingavenuesandunsecuredbusinessloanswithgovernmentbenefits.Contactthe lendingexpertsatBrocFinancetolearnmoreabouttheavailableoptionsandfind
unsecuredloansthatmatchyourneeds.Ourexpertscanhelpyouwitheverythingfrom startupbusinessloanstobadcreditbusinessloanstohelpyousteeryourventuretosuccess!
Source:https://www.brocfinance.com.au/blog/guide-to-understanding-unsecuredbusiness-loans/