Where you don’t offer an asset, the lender reduces their risk by imposing lower borrowing limits, shorter repayment terms in addition to high interest rates.
This makes it a costly option, but also more flexible and immediate.
Here are the types of unsecured lending that could be relevant for small businesses.
Credit cards are a common option for short-term business finance. Due to their high fee structure, credit cards are easy to get your hands on and will save you money if you pay off your balance in full each month before the interest-free period expires.
The interest-free period starts at the beginning of a billing cycle and anything purchased during that cycle, whether on the first or last day, will be charged interest from the purchase date if you don’t repay the full balance by the due date.
If you don’t keep on top of payment, it could get dangerous. Business credit card interest rates can be really high – up to 20%. In addition, you’ll be lumped with
- Annual account fees
- Fees to use reward programs
- Fees for late payments
- Payment dishonour fees
- Fees for exceeding your credit limit
Most Australian SMEs have a business credit card even if they have no other form of debt as they are ideal for smaller purchases and paying bills. You can also earn frequent flyers and other rewards, although rarely do the value of reward schemes outweigh the cost to your business.
Unsecured business loan
An unsecured loan is a general purpose short-term loan supported by cash flow.
In this scenario, you would loan a fixed amount which your business will repay over generally 3-12 months, in regular installments, often daily or weekly.
There’s usually a quick approval timeframe, so if you have a seasonal business or a business with a stable monthly cash flow and need to access funds quickly, this could be a relevant option.
Both banks and non-bank lenders have a number of options online – you’ll need to compare lenders to get the best rate.
If your business is relatively new or you are self-employed, the director of the business may be asked to provide a personal guarantee.
Depending on your risk profile, and capacity for repayments, you could borrow between $5000 and $500,000.
Obtain an Annual Percentage Rate (APR) to calculate what the loan will cost you over a year and compare with other lenders.
An unsecured loan is fast cash, but costly.
If it’s a stop gap measure, for example to close an important business deal, you could try to negotiate a discounted rate for early repayment if you could repay as soon as your business deal has gone through.
Unsecured loans have become a popular form of small business finance in Australia due to their accessibility, speed and flexibility.
Unsecured small business loan
This loan type which is growing in popularity in Australia, is specifically defined for businesses;
- With a minimum monthly revenue of $5000
- That have been trading for at least 6 months
- For an amount of up to $150,000
Like general unsecured loans, these loans can be accessed through banks or specialist small business lenders. You’ll often get a lower interest rate from a bank, but faster approval from a non-bank lender.
You often only need to supply your bank statements and can get same-day approval through a non-bank lender, but as with all unsecured lending options, they can be costly.
Unsecured overdraft/Line of Credit
The main difference between a loan and line of credit is that you won’t have to pay interest on funds you’re not using. You have an agreed credit limit and can only access funds up to that amount.
Like unsecured loans, a line of credit is general purpose and usually has a term of around 3-12 months.
Similar to credit cards, interest is often calculated daily and charged at the end of the month.
Merchant Cash Advance
This is a type of short-term loan for retailers or hospitality businesses that make a minimum average volume of sales via EFTPOS and credit card. You repay the loan in daily installments as a percentage of your sales.
It’s quick to set up and has the advantage that repayments are tied directly to your cash flow so if your income fluctuates from day to day, this option is more flexible than making repayments on a fixed schedule.
However, interest rates can be as high as 200% APR (annual percentage rate) and lenders aren’t regulated like banks, so they have more freedom to impose their own restrictive conditions.