How to Avoid Being Caught in a Debt Trap of Unsecured Loans


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Unsecured loans have great utility for business.

Their application process and assessments can often be done in moments and, in some cases, funds can be available the same day.

There are even unsecured overdrafts – a genuine line of credit option with interest charged only on funds in use.

(Know where to find the cheapest unsecured Business Overdraft on the market? We do – get access here)

When is it best to use an Unsecured Loan for my business?

Unsecured loans are best used to fund an opportunity that brings a return or a benefit to your business that justifies the cost of finance.

The best unsecured lenders have products without establishment fees and allow you to payout your loan early without penalty or having to pay the full-term contract value.

This can save you thousands.

There are unsecured lenders who are comfortable with bad credit and even judgments but these providers are comparatively very expensive and their loans are typically over much shorter terms.

Some lenders will charge repayments with daily direct debits, which is important to understand before you agree to a loan contract.

What are some of the risks with an Unsecured Business Loan?

It’s important to remember that loans repayments are on a regular basis so they can take away from business cash flow.  So even if you have a profitable business the wrong unsecured business loan can create a drain on working capital.

High-cost loans paired with short repayment terms can be a massive burden on cash flow to a business.

Sometimes business owners come to for help after they’ve taken a second or even a third unsecured loan because the repayment burden of the first loan impacted cash flow to the point they needed more and more injections of capital.

Business owners in this situation describe feeling trapped.

If you’re considering an unsecured term loan, understand they’re not always ideal for working capital.

If you’re not sure about other options beforehand talk to a professional and get advice.

If you’re already struggling with an unsecured loan or two it may pay to consolidate debts to free up business cash flow.

What Are My Options for Consolidating Business Debts?

There are a number of options for consolidating debts into one loan.  Typically business owners will seek a solution with a lower rate and a longer term as this lessens the monthly repayment and assists with business cash flow.

Major banks and other lenders will provide loans to consolidate debt secured by property.  There are both ‘full document’ and ‘low document’ options available.

Can I Still Consolidate My Debts if I don’t have Property?

If you don’t have or don’t wish to use property security another option is to raise capital against equipment and machinery.

Unlocking the equity you hold in business assets will get you a lower rate, a longer term and a monthly repayment that’s a fraction of a problem unsecured loan.

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Final Thoughts

Unsecured business loans aren’t all bad. A lot of the issues that arise with unsecured business funding occur when they’re asked to be a working capital or cash flow solution. Whilst they might plug a lack of cash temporarily their short terms and high rates of interest can exacerbate a cash flow problem in the future.

A lot of this can be avoided with the right lender selection or choosing a different kind of line of credit for your business.

To talk to about the best working capital solution for your business get in touch here.


What are working capital loan solutions other than an Unsecured Business Loan?

A Sale and Leaseback is a form of equipment finance you can use to raise capital against the equity you hold in equipment and machinery.  

This type of finance can be used against vehicles, trucks, trailers, construction equipment, manufacturing equipment and other factory equipment.

Other finance solutions that may suit your business could include traditional Overdrafts, a Line of Credit, Trade Finance, Invoice Finance, loans secured by property and Fitout Finance.

What documents do I need to supply when applying for an Unsecured Business Loan?

With generally, no documents are required for Unsecured Business Loans up to $500,000.  This includes our market-leading Unsecured Business Overdraft – a 5-year genuine revolving line of credit.

Applications can be completed over the phone in a few minutes and assessment is completed by reviewing linked bank data.

For Unsecured Loans of more than $500,000, a business may need to provide management accounts, 2 years of financials, aged payables and receivables and a printout of their ATO Tax Portal.

For businesses operating out of a trust or for shares held in a trust structure, it may be necessary to provide a copy of the Trust Deeds.

How long does an Equipment Finance application take?

It depends on the lender selected for your Equipment Finance loan.  Some applications can be completed in just a few minutes with over the phone.

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