Unsecured business loans are loans that are not backed by collateral or any tangible security. Unlike secured loans which require borrowers to pledge assets as security, unsecured loans are often lent to borrowers based on their creditworthiness (Equifax score on the credit file of the company and the individual, the length of trading of the business as well as the transactional record of the business (the amount of free cash flow available every three months) and the strength of the financials.
Unsecured loans do not require the borrower to offer tangible security such as real estate (commercial or residential), equipment or inventory as collateral. This reduces the risk for the borrower but greatly increases the risk for the lender.
Dependent on the financier, since unsecured loans are riskier for lenders, they generally charge a higher interest rate. The interest rate charged is sometimes based on the annual revenue or turnover of the business. The higher the revenue, the lower the interest is charged.
Quite often, given the risker nature of these loans, the unsecured lenders must ensure that the borrower is creditworthy and that they have never defaulted or missed any of their monthly repayments. This means that your Equifax score is vital. Any score below 500 often means you will not be eligible for these types of loans. Generally, the financier’s software will reject these applications before reaching the credit assessor.
Given the risker nature of these loans, the financier generally wants the pay-back period on these to be as short as possible. The term of these loans can range from 36 to 72 months.
Personal Guarantee: With unsecured Lending, the general targeted audience is private companies. This means that they will require a personal guarantee from the directors and the owner who holds more than 50% shareholding.If the business fails to repay the loan, the guarantor is personally responsible for the debt.
Often if the sponsors choose to ignore the repayment of the debt, a credit default will generally be listed against the guarantors.
A misconception from many people is that the Big 4 are difficult to deal with when it comes to unsecured business lending.
If the applicant is up to date with their taxes and lodgments, generally, the big four would be the financiers to deal with, as their rates are much cheaper than those of the unsecured lenders. The term of the facility is also a lot longer, given the banks have more Capital behind their back to lend out.
Many applicants need help to articulate the rationale for the funds, which often impacts the banks’ credit decision. Remember, given the nature of these loans are unsecured- the bank credit assessor would need to be comfortable using the funds.
It is important to note that the credit appetite, interest rate, the financial information required, and the terms of unsecured business loans may vary depending on the lender.
This is why engaging a competent commercial broker is critical when applying for a business loan.
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