Unsecured Business Loan | Interest Rates

The interest rates applied to different types of funding products are determined by a range of factors. In regard to the difference between secured and unsecured options, one of the key differentiators is risk. Secured products are funding for physical assets such as motor vehicles and equipment. The asset is the security. The lender has the option to repossess the asset if the borrower defaults. With an unsecured product, there is no physical asset to repossess. Unsecured options do not have the same security for lenders as secured products and are rated as higher risk. This results in higher interest rates.

An unsecured funding product is one where the purpose of the funding is not provided or available as security against the funds borrowed. Secured funding will be provided for physical assets which provide the lender with the security that they have an option to recoup funds should the arrangement go into default. An unsecured option is used for purposes other than physical assets or where the asset is deemed unsuitable for security. These may include older models of equipment and expenses such as purchasing new stock which will be sold as merchandise, training and marketing and other non-asset expenditure.

The use of the term ‘security’ in the financial sector refers to security of the funding from the lender perspective. Funding may be secured or unsecured by the goods or other purpose for the funds. The lender has the security that they can repossess the assets if required. An unsecured product does not have that security for the lender but does not present any increased or otherwise risk to the borrower. The definition of security in financial terms may be interpreted as ‘safety’ for lenders.

Unsecured funding may present a flexible and workable option for operators requiring funds for non-asset expenditures. The product allows enterprises to source funding for a wide range of needs where an asset acquisition funding product is not suitable. Interest rates may be fixed or variable, offering borrowers with flexibility in structure and other conditions.

A secured product is suited to the acquisition of physical goods that can be offered as security or guarantee against the funds. These products include Chattel Mortgage, Leasing, Rent to Own, Hire Purchase and general secured funding. An unsecured product is selected where the purpose is not a physical asset or goods which can be used as security. A lender may not accept the goods based on age and condition or the purpose may be a non-asset expenditure.

No. Interest rates on all funding products can vary across the market. Credit providers set their own rates based on their own criteria and guidelines, costs of sourcing their own funding, outlook for rates and the economy, the risk associated with different products. The rates advertised will be for applicants with a good credit profile. The specific rate offered will be based on the lender’s assessment of the application. Lenders can vary in their assessment of risk based on their guidelines.

The reason why unsecured funding is applied for may impact the interest rate which is offered. An assessment is made by the lender of all aspects of the application when an offer is being prepared. This includes the creditworthiness or risk associated with the applicant, the amount requested and the purpose of the funding. Lenders may have their own criteria around for what purposes they will extend funds.

Unsecured funding may be sought for a wide range of non-asset expenditure by businesses. The purposes may include:- purchase of stock for a retail, import or wholesale operation; training and development courses; marketing campaigns; consultancy services; some IT systems which may not be considered suitable for asset acquisition products; costs associated with the initial setup of an operation; product research and development expenditure; and many others.

Although an unsecured product is not secured by a physical asset, some form of collateral or guarantee may be requested by the lender. A personal guarantee from the owner of the enterprise may be accepted as such security. A risk assessment of the individual providing the guarantee would be undertaken. This would involve a review of the credit profile and financial position. Where the risk is rated as lower based on the quality of the personal guarantee, a lower interest rate may be applied to the unsecured funding. This is subject to lender approval and may vary across the market.

An alternative to an unsecured funding product may be a non-bank overdraft. An overdraft may be used for a wide range of different purposes. It may be established for a short period or as an ongoing line of credit. The purpose for which an operation requires funding may determine which is the more appropriate solution. Both products offer flexibility and versatile. The interest rate on overdrafts may be higher than an unsecured product. But it may provide greater flexibility to finalise the commitment earlier and attract lower total interest payable.

The interest rates offered on all funding products are based on the assessment by the lender of the individual application. This includes the assessment of risk which is based on the credit review and review of the financial position of the enterprise. With some applications, the personal credit profile and financial position of owners or directors will also be assessed. To obtain a specific rate for an individual funding request, a quote would need to be requested and/or application submitted.

Interest rates on unsecured funding products may be at a fixed or a variable rate. This will be determined by the lender and potentially in discussion with the borrower at the time of application. Some lenders may attach a variable rate to all unsecured products, while others may attach a fixed rate. With a fixed rate, the rate will remain unchanged over the full term. With a variable rate, the rate is subject to change. Changes to interest rates can occur when the Reserve Bank announces changes to the cash rate and/or when individual lenders change their rates. Lenders may change their rates based on market conditions and their outlook for rates and the economy.

The type, size and structure of an enterprise may impact the interest rate offered on funding products. Structures include corporations, partnerships, sole traders, ABN only holders, SMEs and others. The size of the enterprise and the time they have been operating may reflect on the lender’s risk assessment of the application. A small enterprise that has been trading for a long period and has a good credit profile and strong financials may be assessed as low risk, in the same way as a larger corporation. Some may be seen as higher risk and attract a higher rate.

The amount requested is a major consideration in the overall assessment of a funding application. A smaller amount may be perceived as having lower risk compared with a higher amount. The lower risk assessment attracting a lower interest rate. The ability to furnish a debt of any amount forms an integral part of the application assessment and may influence the interest rate offered.