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Financing Your Business with an Unsecured Loan

By Andrew Storrier

3 min read

So your business is humming along nicely and you have more work coming across your desk than you can manage. It could be time to expand, so you’re going to need some cold, hard currency. One quick way to boost the cash in the kitty is to take on an unsecured loan. They’re fast, they have less red tape, but is your business ready?

What’s the Difference?

An unsecured loan is one that isn’t backed by collateral, such as your house or other personal assets, while a secured loan requires your assets be put up as insurance against the debt. Unsecured loans represent more risk to the lender, which often results in a higher interest rate.

Unsecured loans can range from $5000 to $500,000 depending on the size of the business, but they aren’t just money for jam – you’ll still need to meet income and credit requirements. Loans are often approved on business factors, such as your average monthly sales, how long your company has been in operation and the time your business has been at its current address.

The Pros

  • You don’t have to put up your house: Businesses should be self-funding, and unsecured loans free you from mixing your company with your personal life. In the unlikely case of bankruptcy a court can discharge unsecured loans, but it won’t discharge secured ones. The other pro for not putting up your home is that you can access the equity for a secured loan, which can be used to pursue other investment opportunities when they arise.
  • Fast and painless application process: A lender will generally look at your credit score and credit report to check there are no red flags – it should be straightforward. Some loans can be transferred into your bank account in 24 hours.

The Cons

  • Higher rates and shorter payment windows: Lenders are taking a greater risk when you don’t have collateral. As a result, they often charge a higher interest rate and require a shorter loan period. For example, a secured loan may have a 15-year term, whereas an unsecured loan period usually caps off at three to four years.
  • Less money: Lenders won’t be keen to lend you money unless they are sure you are a safe bet. If there’s no security, then the amount you can borrow will only be an amount the lender is comfortable losing.
  • Rigid and unforgiving loan structure: Once you agree to an unsecured loan, it is often difficult to restructure the agreement. Also, some unsecured loans come with repayment fines if you want to pay the loan off before the agreed period. Basically, once you sign on the dotted line you are locked in – regardless of changes in your personal life and/or business.

When is an Unsecured Loan Right for Me?

It’s important you don’t dive straight in when considering an unsecured loan, rather, take time to decide why you really need the money and determine if your business can sustain it.

Here’s a simple checklist to find out if you’re ready for an unsecured loan:

  • Will I have the cash flow over the next few months to manage repayments?
  • Will the business be more profitable as a result of this loan?
  • Is the lender reputable?
  • Can I prove that the business can afford to borrow this much?
  • Do I have the right documentation, such as bank statements, rental forms and income and cash-flow statements?
  • Have I researched the tax implications of taking out this loan?
  • Am I aware of all the fees and charges associated with this loan?

The Federal Government is committed to helping small business, so you could also investigate business grants to help take your company to the next level.

You are responsible for consulting with your own professional tax advisors concerning specific tax and financial circumstances for your business. Intuit disclaims any responsibility for the accuracy or adequacy of any positions taken by you to fund your business. If you have questions regarding accounting and financial issues specifically related to your industry or your business circumstances, you should consult with your own professional tax advisor, accountant, attorney, industry expert or professional association.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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