If you find yourself needing additional funds for your business, whether to support business growth or to see you through uncertain times, then an unsecured short-term business loan might be your best option.
Unsecured short-term business loans are provided over a fixed short-term period of time. This type of funding can be accessed from alternative lenders and through various banks. Short term funding can be in the form of a line of credit or a term loan with an agreed repayment schedule.
As the name suggests, the loan is not backed by personal or business assets such as property, equipment, or other collaterals. Instead, approval is based upon the business’s perceived capacity to repay the loan, through examining records of monthly sales and cash flow. Unsecured business loans are generally short-term in nature due to the risk involved for the lender.
When money is needed for the business urgently, this is the most common and best suited type of loan. Funds are often required as working capital, or to cover unforeseen expenses or to cover a temporary shortfall, or perhaps to deal with emergencies like workplace accidents. Short term business loans are also a great option for business owners wanting to take advantage of a growth opportunity – for example the purchase of new machinery or additional labour to fulfil a large order that will help your business expand. Unsecured business loans offer quick access to funds, sometimes with the possibility of receiving the money requested within 24 hours.
Alternative lenders are generally more risk tolerant when it comes to short term business loans, and will often approve loans that would be usually be declined by banks – for reasons such as bad credit or a lack of assets to back the loan.
However, shorter time frames typically means paying more interest on the loan, and where there’s high risk, interest rates can be increased even further.
In addition, fees can mount up for missed payments.
Generally speaking, no personal guarantees are required for this type of loan. It can be secured by business cash flow, or the creditworthiness of the business itself. Lenders are much more flexible than is typical of traditional banking norms, and quick decisions are made on approvals, making this a useful option in an emergency situation.
How do unsecured short term business loans work?
Unsecured short-term business loans are lump sum loans or lines of credit that can range in amount from $1,000 to $100,000. The amount your business is eligible for may depend on its monthly turnover and capacity to repay the loan within the short time frame specified. The borrower must make regular repayments to repay the loan within a certain agreed time, typically between 3 to 12 months, or make minimum payments towards a line of credit depending on the amount used.
An unsecured short-term business loan is generally intended for a specific purpose. The quick turnaround time for approval can be as little as one business day. This type of unsecured loan often uses factor rates rather than typical interest rates – the factor rate number, when multiplied by the loan amount, represents the repayment due.
This type of loan will generally have either weekly or daily repayment schemes, occasionally monthly. Cash flows can be easier to manage if instalments are broken down into smaller amounts. To maintain the schedule of timely payments, it’s important that your business has a stable revenue stream.
Unsecured short term business loan options
It’s important to be clear on the impacts and consequences of entering into an unsecured short-term loan agreement. Here are some questions to ask to help you determine whether this type of loan is suited to your business needs and capabilities:
How much can I arrange to borrow?
The range varies with different lenders but generally the amount borrowed can be between $1,000 and $100,000. Make sure the lender can offer you the amount that you need right now.
How quickly can I have access to the funds?
If you need it within 24 hours, make sure that this is possible for the lender. Some lenders may take several days to get funds to you.
Who is the lender?
Before making a decision, ensure that you have found a reputable lender – do your research, look them up online and check reviews to see what their reputation is like with previous clients.
How do my repayment obligations look?
Repayment schedules can be drawn up on a case by case basis by lenders – discuss this before you apply and see what works with your type of business and cash flow projections over the term of repayment (which will generally be between 3-12 months).
What fees and other costs will I be liable for?
Different lenders may charge certain upfront fees and ongoing fees that can have a significant impact on the cost of the loan and the pressure of repayment – make sure you are fully aware of what these are and find the most reasonable options for your circumstances by comparing different lenders.
Can my business afford this?
This is the most important consideration of all when looking into an unsecured short-term business loan. Look at all the costs that will be involved over the timeframe of the repayment schedule and assess whether it will be manageable for your business throughout this timeframe
Interest rates and fees
The complete costs of any unsecured short-term business loan will vary according to the lender with whom the loan agreement is made. Be sure to check the following before entering into any agreement:
Depending on the lender, if the loan is approved, certain upfront fees may be charged, such as establishment fees, application fees, and loan documentation or origination fees.
A standard interest rate may be variable or fixed but frequently with this type of loan a factor rate is used – in this case the number of the rate is multiplied by the amount of the loan, giving you the amount that needs to be repaid. For example, if the factor rate is 1.2 and the amount borrowed is $1,000, the amount that will need to be repaid is $1,200.
Additional direct deposit fees and monthly fees may be charged on an unsecured short-term business loan.
Late payment fees
In the case of a late repayment, an additional fee may be charged as specified by the lender. This may be a daily fee.
If you default on the loan you may be liable for default fees.
It is important to check with the lender before your loan application to clarify which of these rates and fees will apply to you in the case that your loan is approved.
In order to qualify for an unsecured short-term business loan, you may need to show evidence that your business has been trading for a specified period of time, with minimum periods often ranging between 3-12 months, depending on the lender’s criteria.
You may also need to show evident of a minimum amount in revenue per month. The lender may ask you to produce 6 months of bank statements to back this up.
If your business is a start-up or makes a revenue of less than the monthly minimum specified, you may need to look into other types of loans.
How to apply for an unsecured short term business loan
There are eligibility criteria that must be met for any unsecured loan. These vary according to the lender in question and it’s best to be clear on requirements in advance so that you have an estimation of your chances of success.
Generally a loan applicant should be over 18 years old, have been in business for a minimum time period that could range from 3 months to one year, must show evidence of a specified amount in terms of average monthly sales that will show you have the ability to make repayments, have a minimum lease period on business property that has already elapsed and a minimum period that is still remaining
The lender will probably ask to see:
- Identification documents for business owners/loan applicants
- Information about the business’s partners/directors
- The business’s ABN
- Bank statements and financial records such as profit and loss statements, cash flow statements, covering a defined period of time (often 6 months)
- Rental documents for business premises
Advice tips and considerations
The implications of unsecured short-term business loans should be carefully considered before you apply. Seek expert advice where possible and keep the following points in mind when making your final decision.
Advantages of Unsecured Short-Term Business Loans
- Not much paperwork is necessary to apply.
- Fewer loan conditions than traditional bank loans.
- You don’t need to have equity to apply.
- Applicants with bad credit are accepted.
- Approval is fast, access to funds is fast.
- Can be used for a variety of purposes and help you to take advantage of transformative business opportunities.
- This type of loan can help you in an emergency situation or when a cash flow issue suddenly arises.
- The loan has a fixed payment structure.
However, caution is recommended:
- These loans have higher rates because of the short-term and high-risk nature of the loan; lenders thus compensate for the lack of long-term interest that is advantageous to them in other types of loans.
- Frequently, because of the short-term nature of the loan daily payments are required therefore a certain level of confidence in your cash flow is necessary – you need to be getting a daily inflow of cash that can be channelled towards repayments as necessary. Where daily payments are agreed on, this can be challenging and stressful for the borrower to keep up if business is not going according to plan.
- If payment schedules aren’t met penalties and fees will apply.
- The lender does not have the possibility of claiming your personal or business assets in case of default on this type of loan, but they can take you to court.
Consider the following issues before you apply:
- What are the rates payable?
- What other fees apply? Be conscious of all the fees involved and any additional costs that might have a significant impact on your ability to make your regular repayments. These loans involve higher fees and rates than alternatives so ensure that this is the best option for your needs and situation.
- How quickly can you have access to the funds and how quickly will you need access to the funds?
- Have you asked for the right amount? Avoid borrowing more than you can afford to repay. It is advisable to be wary of debt – figure out exactly how much your business can handle. Don’t look for amounts that exceed your needs.
- Can your business afford it? If repayments are daily, does your business make high volume transactions on a daily basis? Might the business cash flow fluctuate in the coming months, due to unforeseen circumstances or seasonal changes, and will this impact your ability to meet your repayment commitments?
- Be aware that you will generally need to have been in business for some time in order to be eligible for this type of loan, often needing to show up to 12 months of business activity.
- Be aware of the risk that may be involved, not just to you but also to your business itself and any employees.
Frequently asked questions
Why don’t I need security for my loan?
Fintech has transformed the market when it comes to unsecured business loans, offering financing to those who couldn’t access funding from banks due to a lack of security and inability to meet traditional bank lending criteria. Banks have had to adapt and have now responded by also offering certain unsecured business loan products.
Are my personal assets at risk if my business fails to make repayments and defaults on the loan?
While this type of loan is not backed by collateral, lenders may request that you sign a personal guarantee before approving the loan, in which case you might be personally liable should it happen that your business defaults on the loan. If this happens, lenders may be able to go after personal assets such as your home or car.
Can the repayments schedule be shortened if my business can pay back the money more quickly than anticipated?
Loan terms are often between three and twelve months, depending on the lender. However, if you want to pay back your loan early, in higher amounts, there may be a discount for doing so.
How can I avoid slipping up on the repayments schedule?
One way to keep repayments under control is to open a dedicated account where you can deposit the money for future repayments, covering as lengthy a timeframe as it is possible for you. Continue to top this up as cash comes in and you can stay ahead of the repayment schedule and avoid unnecessary stress as you repay the loan.
What are the tax implications for me if I take out an unsecured short-term business loan?
While it’s generally not possible to claim deductions on many capital expenses related to expanding a business, when it comes to an unsecured short term business loan, you can claim tax deductions on interest on the loan and on expenses incurred in order to generate income for the business, such as insurance, rent, wages, telephone and internet bills, accounting fees and others.
Contact us to get the funds your business needs to succeed
Mortgage World Australia has been helping people to realise their vision for thriving, successful businesses for nearly two decades now. If you’re ready to grow, seize a unique opportunity, or simply need to get through a difficult phase that will lead to better times, our specialists are here and ready to advise you on the next steps to take.
Call us today to discuss how we can take your business to the next level of success.