Although unsecured credit has made up less than 5% of SME lending in recent years, according to the RBA, that doesn’t mean that there isn’t still a strong need among small and medium businesses for a collateral-free loan option. After all, part of this can be attributed to how much larger secured lending tends to be, rather than a lack of demand for unsecured finance.
Not every business owns property or equipment worth putting up to back the facility, and plenty who do would rather not risk it. An unsecured business loan opens the door to finance for businesses in that position.
What is an unsecured business loan?
An unsecured business loan is a type of commercial finance that doesn't require you to put up an asset, such as property or equipment, as collateral. Instead, lenders assess your business's trading history, revenue and credit profile to determine whether you qualify and how much you can borrow.
Because there's no asset securing the loan, lenders take on more risk. This generally means higher interest rates and lower borrowing limits than a secured loan, in exchange for a faster, simpler application process.
Types of unsecured business loans
Standard unsecured business loans
This is the most common type of unsecured finance, where you receive a lump sum upfront and repay it through fixed principal and interest instalments over an agreed term. Repayments are typically made weekly, fortnightly or monthly until the loan is fully paid off.
Lenders commonly offer standard unsecured loans from $5,000 up to $300,000, with terms ranging from a few months up to five years. Because there's no asset to assess, these loans can often be approved and funded quickly, sometimes within 24 hours. They suit businesses that know exactly how much they need to borrow and want a clear, structured repayment schedule.
Unsecured low doc business loans
A low doc business loan is designed for businesses that can't provide the full financial documentation a standard lender requires, such as tax returns or audited financials. Instead, you might rely on documents like BAS, business bank statements or an accountant's letter confirming your earnings.
These loans are common among newer businesses or those with less conventional income structures. Since lenders take on more risk without full visibility over your finances, low doc loans generally come with higher interest rates too.
Unsecured business lines of credit
Rather than receiving a lump sum, a line of credit gives you access to funds up to an approved limit, which you can draw down and repay as needed. You only pay interest on the amount you've drawn, not your full limit, and once repaid, that amount becomes available to use again. Interest rates and fees are generally higher than on a standard unsecured loan.
Unsecured lines of credit are commonly available from $5,000 up to $250,000 to $300,000. Rather than a fixed loan term, you’re usually given a set period over which to repay each drawdown, often one to two years. This makes it well suited to businesses with irregular cashflow, since you're not committing to a lump sum you may not need in full.
Business overdrafts
A business overdraft works in a similar way to a line of credit but is attached directly to your business bank account, letting you spend beyond a zero balance up to an agreed limit. Limits typically range from $5,000 to $250,000 and, like a line of credit, the facility is ongoing rather than fixed to a set term.
You only pay interest on the amount you're overdrawn, and there's usually no fixed repayment schedule. This flexibility comes at a cost, with overdrafts typically carrying higher interest rates and fees than loans, making them a more expensive option for holding debt over the long term.
How to know which type of finance is right for your business
"Every business is different, so the best solution for your small operation depends on why you need it. If you’re buying an expensive asset or investing heavily in your business, paying out of your overdraft or putting it on your card will probably set you back the most in interest and fees. If you only need to access $5,000 and can pay it back within the month, you might not need a full business loan (though taking one out and clearing the debt quickly will help your credit score)."
What can I use my unsecured business loan for?
The point of an unsecured business loan is to be flexible and able to be used for a wide range of purposes, such as (but not limited to):
- Boosting your cashflow
- Buying inventory
- Clearing and consolidating multiple outstanding debts
- Covering advertising costs
- Funding renovations to your business premises
- Helping to start up your business
- Hiring new staff
- Purchasing assets that are too old or not in good enough condition and don’t meet secured business loan requirements
How are unsecured commercial loans different to secured loans?
| Unsecured business loans | Secured business loans | |
|---|---|---|
| Collateral | No | Yes |
| Borrowing range | Up to $300,000 | Up to $5 million+ |
| Repayment terms | Up to 5 years | Up to 30 years |
| Interest rates and fees | Higher | Lower |
| Processing and approval time | As soon as 24 hours or the same day | From one to two business days up to three or four weeks |
| What happens if you default? | Legal action and seizure of personal assets (worst-case scenario) | Secured asset can be repossessed to recoup lost funds (worst-case scenario) |
Loans can be secured by commercial or residential property, vehicles, equipment, inventory or other options. Chattel mortgages are a common example of secured loans, where the funds are used to purchase an asset.
Secured loans come with lower interest rates and can significantly increase your borrowing power, but it’s important to weigh up the risk of losing that collateral if you become unable to cover your business’ repayments (as well as a potentially slower process).
How much do unsecured business loans cost?
Several factors determine what your unsecured business loan will cost. These include:
- Interest rate: the biggest cost driver, and generally higher than secured loans since there's no collateral to offset the lender's risk.
- Fees: lenders may charge a one-off establishment fee, plus an ongoing account-keeping fee, though some lenders waive one or both.
- Loan term: the longer your term, the more interest you'll pay overall, since interest is calculated on your outstanding balance.
- Loan amount: a larger balance accrues more interest than a smaller one at the same rate and term.
- Repayment frequency: making extra or early repayments where possible can reduce your total interest, as well as helping build a positive credit history.
It’s important to note that some or all of the interest you pay may be tax-deductible, so it's worth speaking to your accountant to confirm what your business can claim.
Case study: finding the right unsecured business loan rate
Deepti wants to take out a $50,000 unsecured loan for her architecture business. She decides that three years is the ideal term to repay the debt, then starts getting quotes from lenders to see how the rate affects her repayments. These are what the numbers work out to be:
| Loan amount | Interest rate | Monthly repayments | Total interest |
|---|---|---|---|
| $50,000 | 8.50% p.a. | $1,578 | $6,822 |
| $50,000 | 9.50% p.a. | $1,602 | $7,672 |
| $50,000 | 11.00% p.a. | $1,637 | $8,932 |
| $50,000 | 13.00% p.a. | $1,685 | $10,660 |
| Calculations are based on a three-year loan. Interest rates are for illustrative purposes only and do not necessarily reflect the rates you’ll receive on your business loan. | |||
On a $50,000, three-year loan, the jump from 8.50% p.a. to 9.50% p.a. alone costs Deepti an extra $850 in interest. She decides to go with the cheapest available rate as a result, with the decision to compare her options saving her thousands of dollars.
Business loan calculator
Crunch the numbers to see what your repayments could look like
Your estimated repayments
$98.62
| Total interest paid: | Total amount to pay: |
| $1233.43 | $5,143.99 |
Pros and cons of unsecured business loans
Pros
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No asset collateral requirements
Perhaps the biggest bonus of unsecured loans is that you don’t need to have an asset to use as collateral for the agreement.
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Flexible usage of funds
Your business loan funds don’t need to be used for one specific purpose. You could take out an unsecured business loan for a variety of different needs.
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Fast approvals
Because your lender doesn’t need to assess your loan’s security, your application can be processed and approved much more quickly.
Cons
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Higher interest rates and fees
Attaching an asset as collateral will score you lower interest rates and fees than what you’d receive on your unsecured loan.
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Shorter loan terms
While secured loans can go well into the millions, unsecured business finance is often available for $250,000 to $300,000 at the higher end.
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Lower borrowing caps
Unsecured business loan terms are also more restrictive, capping out at three to five years. Without any borrowing history, though, you might only be given a few months.
Why apply for a business loan with Savvy?
How to apply for an unsecured business loan with Savvy
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Complete our online form
Share details about yourself and your business, as well as the loan you’re after.
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Send us your documents
Provide any documents and financials we need to assess your business profile.
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Speak to your broker about your options
We’ll give you a call to chat about the options available and your next steps.
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Have your application prepped
We’ll put everything together and submit your application to the lender.
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Get approved, sign off and settle
Once you’re approved, you can sign all the required documents and have the loan settled.
Business loan eligibility criteria
- Be at least 18 years of age
- Be an Australian citizen or permanent resident (or, in some cases, an eligible visa holder)
- Have an ABN registered in your name (loans are available from as soon as one day after registration)
- Meet business usage requirements (at least 51% of any asset you buy, for example)
- Meet your lender’s minimum personal and business credit score requirements
The documents you’ll need for your unsecured business loan application
- Personal information such as your full name, date of birth, address and contact details
- Front and back of your driver’s licence or another form of government-issued ID
- Information about your business’ assets and liabilities, as well as those in your name
- Completed financials from the previous financial year, which can include three to six months of business bank statements may be requested, a trust deed and any amendments (low doc options exist for businesses without access to some or all of this information)
Do I need a personal guarantee for my unsecured business loan?
A personal guarantee is a legal commitment from a business director to personally repay the loan if the business can't. Since there's no asset securing an unsecured loan, lenders often ask for one as a way of reducing their risk. This means that, in a situation where your business is unable to cover its debt, your own finances and/or assets would be used to service the debt.
You're more likely to need a personal guarantee if your business is newer, has a limited trading history or doesn't have strong enough financials to service the loan on its own. Established businesses with solid revenue and a strong credit history may be able to access finance without one, though this varies by lender.
