What are Unsecured Business Loans?

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Unsecured business loans are a common form of business financing where an alternative lender, often a fintech, provides a lump sum of money solely on the basis of an agreement that it will be repaid with interest at a later date.

In practice, repayment terms for unsecured loans usually involve a strict schedule of payments to be made on a certain day every month. Typical repayment periods for an unsecured business loan in Australia range from three months to two years, but other terms are also possible.

Although in theory unsecured loans are among the simplest forms of business financing – you borrow money, repay it at a later date – in practice there is a lot for businesses to consider before committing to such a debt.

Pros and Cons of Unsecured Business Loans

The primary advantage of an unsecured business loan is that, if a business is creditworthy and finds a suitable lender, it can secure a large chunk of money up front without the need for the company or the owner to post an asset such as property as security, simply based on the cash flows of the business and the owners giving personal guarantees. The business owners can decide how much it needs for for working capital and choose a sum accordingly.

In theory, a second advantage should be that this is a relatively simple matter to arrange, however, the paperwork involved in getting a loan from a bank can be onerous and the process slow. In recent years, alternative (or fintech) lenders have provided a faster service, albeit at a higher cost. Businesses with no credit history or a poor credit record often find it impossible to get an unsecured business loan, even when their business is trading healthily.

Cost weighs among the disadvantages of unsecured borrowing: because a lender knows that not all loans will be recovered in full, the cost of these business failures must be factored in to the interest and charges paid by its other customers. On top of that, the lender must finance its own operations and make a profit. This is not just achieved through the interest on the loan: business owners should be careful to factor in other charges – such as arrangement fees and exit charges – when calculating the total cost of an unsecured business loan.

Although a business owner will not explicitly have to offer property or assets as security against an unsecured loan, it is hard to list lower risk among the advantages of this kind of business funding. If a business fails to meet its repayment terms, the lender will obviously try to recover its money and has a range of actions at its disposal to do so. Ultimately, a business could be wound up for failing to pay its debts.

Alternatives to Unsecured Business Loans

In recent decades business loans have tended to be the default option for businesses who were simply unaware of the many other possibilities now available. Repaying loans is actually a major drain on a business’ cash flow, and can therefore be counterproductive. For large sums, all options should be considered, including forms of equity finance.

Even better, the business may find that it has the money all along – tied up in its accounts receivable. If a business can get hold of all the money it is owed without having to wait 30 to 90 days for its customers to pay your invoices, it will often amass a considerable lump sum, as well as ongoing availability to cash each time and invoice is issued to a client/customer, which can be used to finance growing operations and even capital investment.

This is the way that OptiPay funds business growth. Our flexible invoice discounting and other modern cash flow finance solutions, including Trade Finance, help growing businesses to access their own money, which is tied up in unpaid invoices. This requires no further security. It’s a real alternative to an unsecured business loan.

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