Flexible, Functional Unsecured Business Loans

Secured loans are suited to the purchase of specific goods or assets such as motor vehicles, trucks and equipment. With a secured loan, the goods being purchased are accepted by the lender as the security, guarantee or collateral against the funds being borrowed. Lenders may request additional guarantees depending on specifics of the application. Unsecured loans are typically sought for non-asset acquisition purposes or where the goods being purchased are not accepted as suitable security for the loan.

The interest rate is typically higher for funding not secured by assets than for funding which is not secured by goods being acquired. The secured aspect of the funding is the reason for the higher rate. If a secured loan is in default, the lender can repossess the goods to recoup monies owed. Where no assets are used to secure a loan, this option does not present to the lender. The higher interest rate reflects the higher risk factor.

The suitability of finance products for enterprises will depend on the purposes for the funding and individual objectives of the enterprise. The purpose of the loan – asset acquisition or non-asset acquisition, will be a key determinant of the decision. If an operator is unsure of the choice of finance product, they may choose to seek advice from an accountant or financial advisor.

Purchasing stock which will then be sold as merchandise may be suitable for funding with an unsecured finance product. As stock that will be sold to customers over time, the goods would not typically be considered suitable for a secured products so an unsecured option may be considered. The timeframe over which the merchandise will be sold and funds recouped may form the basis for requesting the loan term.

Loan amount limits are subject to individual lender approvals. Lenders have their own criteria and guidelines for approving loans across their portfolio. This may include minimum and maximum loan amounts for some products. The loan amount requested forms an integral consideration in the loan approval process. Most pertinently with large amounts. Operators may canvass a range of lenders to source those that do approve loan amounts as required.

Equipment may be purchased with unsecured financing, but secured financing is more typically used for the acquisition of assets. Where the equipment being acquired is not accepted as suitable security, an unsecured option may be considered. Where the amount required is below the minimum for secured products such as Chattel Mortgage and Leasing, an unsecured product may be a suitable option.

By definition, unsecured finance does not have security. Security in this sense means the funding is not secured by the goods being funded. With an unsecured product, the collateral required will be determined by individual lenders. Lenders operate with their own criteria in regard to approving all types of funding. An assessment of the operation and with certain set-ups the owner or director also, is undertaken to establish creditworthiness. A personal guarantee from the owner or director and/or other collateral in the form of property or assets may be requested.

All applications for funding are subject to lender approval. The approval of a new business for an unsecured product will be subject to the strength of the application. No Doc and Low Doc options are available for new set-ups and this may include unsecured products through selected lenders. New operations that do not have the full documentation may be required to provide collateral with personal guarantees or property for the funding.

An unsecured funding product may suit a business seeking funding to cover initial set-up expenditures. The approval will be based on individual lender criteria. As the new operation may not have a trading history or the full documentation for the application form, consideration as a no doc applicant may be sourced. A personal guarantee from the owner may be requested. Security by way of property or assets may be requested by lenders.

Whether or not the interest rate on unsecured funding changes over the term will depend on the type of rate secured. The interest rate on unsecured products may be sourced at either a fixed or a variable rate. The decision may be determined by the lender or requested by the borrower. Where a fixed interest rate applies, the rate will not change over the term. Where a variable rate applies, the rate is subject to changes in interest rates in line with lender variations which may be driven by RBA monetary policy decisions.

Where unsecured funding is arranged with a fixed interest rate, the monthly repayments will also be fixed. Both the rate and the repayments will remain unchanged over the full term. Where unsecured funding is arranged with a variable interest rate, the repayments are subject to change. When a lender changes their variable interest rates, the rate may change and this would result in a change to the repayment amount.

The amount required for funding, especially smaller amounts, may be an aspect in deciding which is the most applicable form of funding. Many lenders will have minimum amounts that they deal with in regard to commercial funding. This may apply to overdrafts and to unsecured products. The interest rate on overdrafts is typically higher than for unsecured products and that may contribute to the decision. An overdraft is a very flexible option in regard to repayments. An unsecured option will have a fixed term and monthly repayment amounts. Requesting quotes for both products for consideration may be an option or discussing the decision with an accountant may be advisable.

There are numerous factors which will determine what terms are available for unsecured funding. The terms offered on unsecured funding may vary. Variations can be found with individual lender criteria. The amount of the loan may also determine the term approved. Terms as short as 3 months may be sourced from some lenders and up to 7 years from some, depending on the amount and individual operation.

Yes. Covering cash flow shortages is a purpose for which unsecured funding may be sought. Terms may be requested to meet specific expectations in regard to how long the shortage may be present. A personal guarantee may be requested to be provided by the owner. Collateral through property or other assets may be required.

To apply for unsecured credit, operators will need to provide documentation around the financials of the commercial plus details of the purpose or purchase for the credit. Some banks and credit providers will approve unsecured credit based on the strength of the cash flow of the operation. Providing strong and extensive documentation is important and may include income tax returns, BAS statements, bank statements and verifiable trading figures.