Key Takeaways
- Unsecured loans are a way to borrow funds without having to put up property or assets as collateral. Most of the time, these loans are term loans or lines of credit.
- Instead of taking on more risk, lenders look at your creditworthiness, past cash flow, and other things that show you can pay back the loan.
- Unsecured loans are easier to apply for, get approved faster, keep your borrowing power, and can be used for a variety of purposes.
- The downsides are higher interest rates, smaller loan amounts, and shorter terms.
- It's important to figure out what you need and whether you qualify for unsecured loans before deciding if they are 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.
Pros of Unsecured Loans
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.
Analyse Interest Rates and Fees
Compare the interest rates of unsecured loans with other types of financing and see if those rates work for your business. Don’t forget to compare rates across lenders too.
Look over the repayment terms.
Check the repayment schedule to make sure it works with your business’s cash flow. It’s also important to know what the penalties are for paying off a loan early or missing a payment.
Look at the Risks
Because there is no security, unsecured loans usually have higher interest rates than secured loans. Think about what will happen to your business if you have trouble making payments. What will happen to your business if you don’t pay?
In Summary
Unsecured loans are a good option for Australian businesses that need funds, but they’re not always the best choice for every situation. Before you apply for an unsecured business loan, you should think about your own financial situation very carefully.
Let Loan Experts Help You Secure the Right Funding
Not sure if unsecured loans are the right choice for you? Contact our team for expert help with getting business loans and picking the best lender for your needs. Send us a message today.
Disclaimer: Loans and the benefits associated with them are only available to those 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.
