Business growth often requires some debt. This could mean expanding to new premises, hiring staff, investing in new stock or being able to better manage your cash flow. At some stage, many Australian business owners will seek funding from banks or alternative lenders in order to take their business to the next level. And an unsecured business loan is a flexible, convenient way to get the finance you need.
What Is an Unsecured Business Loan?
An unsecured business loan is financing that is obtained without providing collateral. Collateral is something that you or your business owns that you pledge as security for repayment and could include property, such as your home or vehicle, your savings, unpaid invoices, inventory and more.
Essentially, the loan is issued and supported only by the borrower's creditworthiness. With unsecured business loans, the lender cannot seek repayment by going after your assets. However, you still need to meet income and credit requirements, and many alternative lenders ask for a personal guarantee from the directors of the business.
What is a Personal Guarantee?
Financial institutions understand that, for many small businesses, the business’s financial health is directly tied to that of its owner. That’s why many lenders may enquire about your personal credit history or require a personal guarantee.
A personal guarantee is a written promise from a business owner or executive guaranteeing payment on a loan. If the business cannot repay the debt, the individual guarantor is personally responsible. If you sign a personal guarantee and you don't repay the loan, it could hurt your credit score.
5 Key Benefits of Unsecured Business Loans
There are many reasons why an unsecured loan might be better for your business situation. Here are just a few:
- You don’t have to provide collateral
Property is commonly used as collateral in a secured loan but a study by East & Partners recognised the availability of unsecured credit, with no requirement to mortgage the family home, is the most important factor for SMEs seeking finance to fund growth. Applying for an unsecured business loan means you do not offer your family home or other personal assets as collateral. You are safe in the knowledge that whatever happens in business, your personal assets won’t be at risk.
- It’s easier to qualify
Unsecured business loans are designed to be easy to obtain. Many lenders will consider your application if you’ve been running a business for at least 6 months, with a minimum annual turnover $50,000.
- Quick application and approval
It can take weeks to get a secured loan. With unsecured loans, you can often apply online in just a few minutes by connecting your cloud accounting software and online banking details. Plus, more often than not, you will receive a lending decision within 24 hours.
- A less-than-perfect credit history is okay
It’s quite common for lenders to offer unsecured loans to business owners that do not meet the bank’s requirements. That means businesses with a tarnished credit history are still able to access the finance they need for growth. However, businesses with a strong credit history are offered a more competitive interest rate, as the interest rate is a reflection of risk the lender is taking.
- It’s more flexible
Unsecured business loans are flexible in more ways than one. Not only do you have the power to choose the loan amount you desire for the time you need it, some lenders allow you to repay early without penalty. Each lender is different, however, so you must do your due diligence to make sure this is an option for your business.
Why Are the Interest Rates Higher Than a Secured Loan?
There are several key differences between unsecured and secured loans. The main difference, however, is that a secured loan is backed by collateral such as property, and an unsecured loan is not.
Unsecured loans carry more risk than a secured loan, which is reflected in the interest rate. A higher interest rate reflects the higher level of risk from the lender’s perspective, but the benefit for businesses is that they don’t have to tie their personal property to the loan itself.
Unsecured business loans are a tailored finance solution based on the health of your business and your ability to repay. You need to be confident you can pay the loan back – and quickly – and in doing so, unsecured business loans can have a hugely positive impact on your business.
When Unsecured Business Finance Might Work for You
Unsecured loans can be used by businesses of all shapes and sizes, but they might be most applicable for certain types of situations including:
- Businesses that need funds quickly and want fast approval times
- New businesses operating for less than two years
- Seasonal or high-volume, small dollar sales businesses
- Businesses with less-than-perfect credit history
- Businesses that are willing to pay slightly higher rates to access the finance they need more easily
- Businesses without valuable assets
How to qualify for an unsecured business loan
While unsecured loans don’t require collateral and often have less stringent requirements, there are a few things to know before you apply. Specific qualifications will depend on your lender, but generally, you will have to meet a few requirements.
- Income requirements:
Lenders will want to see a proven record of solid business income. For instance, at Lumi, we require a minimum turnover of $50,000.
- Business requirements:
There might also be more general requirements around how long your business has been running and where it is setup, to ensure lenders are working with established businesses. Lenders might only work with businesses registered in specific countries and the time in operation generally ranges anywhere from six months to more than two years.
- Credit history:
Lenders will also look at your credit history. As discussed, businesses with a shaky history can still be approved and applications are reviewed on a case-by-case basis to better assess the risk level.
- Use of funds:
How you plan to use the funds might also impact whether you qualify. For instance, Lumi Business Loans must be used for business purposes, as we do not provide personal loans. You can increase the competitiveness of your application by providing a clear plan of short-term and long-term goals and how you plan to spend the capital.
How to Apply for an Unsecured Business Loan
Thankfully, Lumi has streamlined the traditional loan application process, now allowing you to apply online within just a few minutes. Gone are the days of having to wait endlessly for approval. With Lumi, you receive your application outcome within just 24 hours. Once approved, small business owners can expect their funds to be deposited the following business day. To find out more about Lumi's fast unsecured business loans, check out our FAQ page.
Why Choose Lumi for Your Unsecured Business Loan?
To date, Lumi has funded hundreds of Australian small businesses across a wide range of industries. We’re one of the only direct lenders that allows small business owners to repay their business loan early with no fees or penalty, plus once approved, you can expect to receive your funds the following business day. It’s that simple.
With our quick and easy online application and continued support throughout your loan journey, Lumi provides Australian SME owners, just like you, with the capital they need to sustain or grow their business.
Unsecured Business Loans FAQ
What are the minimum requirements to apply for an unsecured business loan with Lumi?
To qualify for our loans, you must run an Australian registered business that has been operating for at least 6 months. Additionally, your minimum gross annual turnover must be $50,000.
What is the interest rate of your unsecured business loans?
Because the majority of our loans are over a 6-month period, we don’t use an annualised interest rate to describe our loans. We pride ourselves on offering predictable and transparent loans, therefore the entire loan repayment amount will be disclosed upfront.
How can I find out what my weekly repayments would be before I apply for an unsecured loan?
We offer a free loan repayment calculator that allows you to quickly and easily work out what your weekly loan repayments will be. However, all repayments will be set out in black and white from the beginning, before you sign off on the funds.
Are there any fees associated with an unsecured loan?
Our only fee is a 2.5% establishment fee that is deducted at settlement. From then on, your weekly repayments are calculated up front and the same amount will be direct debited each week. A Lumi loan contains no hidden charges or additional fees.
What industry do I have to be working in to apply for an unsecured business loan?
We provide unsecured business loans to any Australian registered SME that qualifies! Just some of the industries we’ve funded so far include hospitality, franchises, retailers, professional services, trades and labour, creative agencies, health and beauty services and much more.