An external cash injection can be a catalyst for small business growth. But getting a secured business loan can be challenging, especially if you don’t have assets you can use as collateral.
One of the most popular alternatives is to use an unsecured business loan to get the funding you need. You don’t need to provide collateral, and you can access funding much faster than a secured loan from a traditional lender.
Let’s take a look at how unsecured business loans work and if it could be a good funding solution for your business.
What Is an Unsecured Business Loan?
An unsecured business loan is a financing solution that allows a business to access funding without using assets as security for the loan.
With a secured business loan, the finance provider requires the borrower to use their property or company assets as collateral. If the borrower defaults on the loan, the lender can seize the collateral to recoup the loss.
With unsecured business loan lenders, there is no collateral requirement. Instead, the lender will examine the company’s financial reports, credit score, cash flow projections, and other factors to determine the amount the business owner can borrow.
Because there is no security on the loan, the finance provider will usually require a personal guarantee for the debt. Interest rates are generally higher due to the increased risk.
The Pros and Cons of Unsecured Business Loans
An unsecured business loan can be a valuable financial tool. But it does have disadvantages and isn’t a good solution for every business.
Pro – Low Upfront Costs
There are no asset valuation and legal fees that are typically involved with a secured business loan.
Pro – No Risk to Assets
You don’t run the risk of losing your home or other assets if you are unable to repay the loan. But the loan provider may require a personal guarantee.
Pro – Fast Application Process
Unsecured loan applications are much faster than a secured loan from a traditional lender.
Pro – No Collateral
As the name suggests, you can still qualify for an unsecured business loan if you don’t have assets you can offer as security.
Con – Smaller Funding Limits
Because the loan isn’t secured with collateral, funding limits are generally smaller with unsecured business loans. If you need to fund a high value business expense, Asset Finance or a secured loan could be a more suitable option.
Con – Higher Interest Rates
Unsecured business loans are riskier for lenders than loans that are secured with collateral. Because of the increased risk, interest rates are typically higher.
Con – Need a Good Credit Score
Without collateral, unsecured loan providers will use your credit score to determine how much risk is involved in the loan. If you have a poor credit score, you may struggle to qualify for an unsecured loan or have to pay a higher interest rate.
Con – Hard to Access
To qualify for an unsecured loan, the funding provider will usually want to see your business plan, cash flow projections, and financial statements to determine your eligibility for funding.
Is an Unsecured Loan Right for My Business?
An unsecured loan can be a good option if you would prefer to avoid using your assets as collateral for funding, or you need to quickly raise funds to capitalise on a time-limited opportunity.
But they do have drawbacks and can be hard to access for new businesses and those with a poor credit score. You’ll also end up paying a higher interest rate with an unsecured loan.
If a secured loan is out of reach, and an unsecured loan is also unsuitable due to a low credit score or short trading history, Invoice Finance can be the best alternative funding solution.
The Best Alternative to an Unsecured Loan
Invoice Finance is unique as it doesn’t require the collateral of a secured loan and doesn’t have the strict lending criteria and high-interest rates of an unsecured loan. You can use your unpaid sales invoices as collateral to secure funding.
It allows you to unlock the capital tied up in your accounts receivable and get paid faster for the goods and services you have already sold.
You can access up to 95% of your invoice value as a cash advance. When the invoice is due, the finance provider will collect the funds from your customer and transfer the balance to you less fees.
Rather than taking on debt, Invoice Finance is a way to release the money you have tied up in your business assets – your accounts receivable. On average, Australian small businesses are owed around $52,000 by their customers.
Unlocking the capital owed to your business can provide the cash injection you need to grow and expand.
Benefits of Invoice Finance
Improved Cash Flow
The most compelling benefit of Invoice Finance is the ability to improve cash flow and boost working capital. Instead of placing debt onto your business through a secured or unsecured loan, you can release the money tied up in your unpaid invoices and get paid faster.
Fast Funding
Invoice Finance has a much faster application process than a secured loan application, and it’s usually quicker than an unsecured loan application. It can take a day or so for the facility to be put in place, depending on how quickly you can provide financial documents. Once the facility is arranged, you can get a cash advance in as little as 24 hours of submitting an invoice.
Easy to Access
Unlike secured and unsecured business loans, Invoice Finance is accessible to the majority of businesses. Even if you have a low credit score, short trading history, or have been rejected for a business loan, there’s a good chance you will qualify for Invoice Finance.
Funding Limit Grows in Line With Your Business
Because the funding facility is linked to your sales invoices, you don’t need to renegotiate terms with your funding provider. As you grow your business and make more sales, the credit limit increases.
No Property Security
There’s no need to use your home as collateral to secure funding. Unlike a secured loan, your invoice is usually the only security you need to get financing.
Take a look at our case study to see how Invoice Finance has helped confectionary company Bramble & Hedge overcome a lack of property assets and get the funding it needs to secure long-term growth.
When Your Company Should Use Invoice Finance
Invoice Finance is unique as it sits between secured and unsecured lending. Many business owners find that they don’t qualify for a secured loan due to the collateral requirement. But unsecured loans are also out of reach due to credit score requirements and high-interest rates.
With Invoice Finance, you can get funding without using your home as collateral, and even if you don’t have a perfect credit score and long trading history. You can unlock the value tied up in your accounts receivable and reinvest the funds in your business.
You can choose between a Debt Factoring or Invoice Discounting solution.
With a Debt Factoring solution, you can outsource your collections and account management to the finance company. Rather than spending your time chasing unpaid invoices, you can focus 100% of your attention on the growth of your business.
With invoice discounting, you remain in control of your collections and account management.
Read our guide How Does Debtor Finance Work for a closer look at the differences between the types of Invoice Finance.
You can also opt for a Selective Invoice Finance facility where you choose which invoices you want to use to get immediate funding.
Unleashing Business Growth With ScotPac
Cash flow is key to business growth. Here at ScotPac, we’ve helped Australian small businesses to get the funding they need to expand for over 30 years.
If you need external funding to take your business to the next level, speak to one of our friendly Invoice Finance specialists today. We’ll help you find a solution that enables you to achieve your goals and fits with your existing funding arrangements.
Give us a call on the number below or fill in our simple online application form. It won’t impact your credit score, and we’ll get back to you shortly with a tailored funding solution for your business.