Key Takeaways
- When you take out an unsecured loan, you don't have to put up any assets or property as security. Most of the time, these loans are either lines of credit or term loans.
- Lenders don't ask for collateral; instead, they look at other things to show that you can pay back the loan, such as your credit score and cash flow.
- You can get approved for unsecured loans faster and easier than for secured loans.
- Some of the downsides are higher interest rates, shorter terms, and less money you can borrow.
- You should figure out your borrowing needs and whether you qualify before deciding if an unsecured loan is the right choice for you.
The borrower doesn’t have to put up any property or assets as security for an unsecured loan. Instead, lenders look at other things to decide if someone is eligible. These include the borrower’s credit score, financial history, and ability to pay back the loan based on their cash flow and income.
Many business owners like unsecured loans better than other types of loans when they need to cover cash flow gaps, get working capital, or get cash quickly to take advantage of an opportunity. You can get unsecured loans quickly and easily, but you should know about some possible problems before you sign the loan agreement. Let’s look at the good and bad things about unsecured loans to see if they are the right way for you to get funding.
Unsecured Loan Definition
What does an unsecured loan mean? An unsecured loan is a type of financing that doesn’t require you to put up property or equipment as security. Instead, lenders look at other factors like your financial position and credit score to see if you qualify. Because there is no asset backing the loan, some lenders may view this type of loan as riskier than secured ones. However, the lack of security makes it much more accessible to businesses that don’t have or prefer not to use assets. Unsecured loans are very common and are often a top choice for many small businesses across Australia.
Advantages of an Unsecured Loan
Easier Application
When you apply for an unsecured loan, the process is usually easier than when you apply for a secured loan. When there is no security, the process is easier because you don’t have to show a lot of paperwork to prove the value and ownership of your assets. When deciding how much to lend, lenders mostly look at your credit score and the history of cash flow through your business bank accounts. This can help you save a lot of time and work when you apply.
Quicker Approval
Unsecured loan applications can be processed in as little as 24 hours or as long as a few days. If you need cash quickly, you can get approval faster without having to go through a long appraisal process for your assets.
Use Funds in Different Ways
There are usually fewer rules about how you can use the cash you borrow with an unsecured loan. Businesses can use the money for a variety of things, like working capital, buying inventory, running marketing campaigns, or other costs of doing business.
Retained Borrowing Power
An unsecured loan is a good option if you need funds quickly because it lets you get the funds you need without putting up valuable assets as security.
Cons of Unsecured Loans
Higher Interest Rates
Due to the absence of security, unsecured loans typically carry higher interest rates compared to secured loans.
Shorter Loan Terms
Lenders may also limit the duration of your loan, which can restrict your business’s cash flow due to higher repayments.
Lower Loan Amounts
Because unsecured loans have shorter terms, the loans tend to be for lower amounts than secured loans simply because the shortened repayment period impacts a business’s capacity to service a loan.
Are Unsecured Loans Right for You?
There are a lot of things to think about before deciding if an unsecured loan is right for your business. Here are some things to think about before you make a choice:
Know What You Need
Find out exactly what the loan is for. Are you looking for time-sensitive opportunities, or is your business’s cash flow changing? Determine how much you need and for how long. An unsecured loan might be the best option for you if you need quick, short-term funding.
Know Your Credit Score
Know your credit score so you’re not applying to a lender who will automatically decline your application. Many lenders will require a credit score of at least 550, whereas others accept applications from directors with lower scores.
Pay Attention to the Fees and Interest Rates
Whe you’re reviewing unsecured loan options, take note of the rates and fees and compare them with other forms of financing. Also, don’t forget to look at the rates from different lenders.
Look at the Repayment Terms
Make sure the repayment schedule of the loan works with your business’s cash flow. You should also check the lender’s policy to see what will happen if you pay off a loan early or miss a payment.
Consider the Risks
Unsecured loans usually have higher interest rates than secured loans because of the added risk of having no security. Think about what will happen to your business if you can’t repay because of these higher rates.
Final Thoughts
Unsecured loans are a good way for Australian businesses to get funds, but they’re not always the best choice for every situation. You should think very carefully about your own financial situation before you apply for an unsecured business loan.
Let us help you secure the right funding.
Are unsecured loans the best option for you? For expert help getting business loans and choosing the best lender for your needs, get in touch with our team. Send us a message today.
Disclaimer: Loans and their benefits are only available to applicants who have been approved. The information provided on this page is general and does not consider your individual circumstances. It is not meant to serve as a substitute for professional advice, and you should not rely on it for any decisions. Always consult with a professional regarding finance, tax, and accounting matters before making any choices or taking action.
