Updated on 12th November 2024

An external cash injection can be a catalyst for small business growth, especially for small business owners. However, getting a secured business loan can be challenging, particularly if you don’t have assets to 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 you would with a secured loan from a traditional lender.

Let’s take a look at how unsecured business loans work and if they could be a good funding solution for your business. If you have any questions about applying for unsecured finance for your small business, make sure to reach out to the ScotPac team today.

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 personal assets as collateral. If the borrower defaults on the loan, the lender can seize the collateral to recoup the loss.

With unsecured business loans, 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. This has implications for interest rates and eligibility criteria for unsecured business loans.

The Pros and Cons of Unsecured Business Loans

An unsecured business loan can be a valuable financial tool but may not be suitable for some businesses. Let’s take a look at pros and cons:

Unsecured Business Loan Advantages

Unsecured business loans offer several compelling advantages that make them an attractive financing option for many businesses.

1. Low Upfront Costs

One of the primary benefits of unsecured business loans is the low upfront costs associated with them. Unlike secured loans, which often require extensive asset valuation and legal fees, unsecured loans eliminate these expenses. This allows businesses to access funding without incurring significant initial costs, enabling them to allocate resources more effectively to their operational needs.

2. No Risk to Assets

With an unsecured business loan, there is no risk of losing personal or business assets in the event of default. While this provides peace of mind for borrowers, it’s important to note that lenders may still require a personal guarantee. This means that although your assets are not directly at risk, you may still be personally liable for repayment if the business cannot meet its obligations.

3. Fast Application Process

The application process for unsecured business loans is significantly faster than that of secured loans. Since there is no need for collateral appraisal, businesses can often receive approval within days or even hours. This speed is especially beneficial for businesses facing urgent financial needs or time-sensitive opportunities.

4. No Collateral Required 

As the name suggests, unsecured business loans do not require any collateral, making them accessible to a wider range of businesses. This is particularly advantageous for start-ups or small businesses without substantial assets to pledge as security.

5. Funds Can Be Used Flexibly

Unsecured loans offer flexibility in how funds can be used. Borrowers can utilise the capital for various purposes, including alleviating cash flow, inventory purchases, marketing efforts, or new equipment, without restrictions imposed by the lender. This versatility allows businesses to respond quickly to changing needs and opportunities and grow according to their needs.

6. Opportunity to Build Credit

Taking out and successfully repaying an unsecured business loan can help improve a business’s credit score over time. For newer businesses or those with limited credit history, this can be an essential step in building a strong credit profile, which can assist with future loan applications and overall financial health.

Unsecured Business Loan Considerations

While unsecured business loans offer several advantages, it’s important to be aware of some potential challenges. Here’s a closer look at these considerations, along with alternative options that may suit your needs.

1. Funding Limits

Unsecured business loans typically come with smaller funding limits compared to secured loans. This is because they are not backed by collateral. If you are looking to fund a high-value business expense, you might explore options like Asset Finance or Secured Business Loans, which can provide larger amounts.

2. Interest Rates

Due to the nature of unsecured lending, lenders face a higher level of risk, which can lead to higher interest rates compared to secured loans. While this is an important factor to consider, the convenience and speed of obtaining an unsecured loan can sometimes outweigh the cost difference.

3. Credit Score Requirements 

Unsecured loans typically require a good credit score since lenders use it as a key indicator of risk.

In summary, while unsecured business loans come with certain considerations, they also offer valuable flexibility and accessibility. By understanding these factors and exploring alternative financing options, you can make informed decisions that align with your business goals.

Is an Unsecured Loan Right for My Business?

An unsecured business loan can be a good option if you would prefer to avoid using your assets as collateral for funding or if you need to quickly raise funds to capitalise on a time-limited opportunity. It’s important to compare unsecured business loans to understand the varying interest rates, eligibility requirements, and personalised financing options available.

But unsecured business loans can be hard to access for new businesses and those with a poor credit score. You should consider the differences in interest rate, eligibility, repayments and application process to ensure it is right for you.

If a secured loan is out of reach, and unsecured business finance is also unsuitable due to a low credit score or short trading history, Invoice Finance can be the best alternative funding solution.

Qualifying for a Business Loan with ScotPac

To qualify for a business loan with us, there are a couple of key criteria you’ll need to meet.

First, your business should have been operating in the same location for at least 12 months, demonstrating stability and commitment to your enterprise. Additionally, we require that your business demonstrates a minimum turnover of $10,000 per month in total sales.

Meeting these requirements not only helps us assess your eligibility but also positions you for a successful partnership as you seek to grow and expand your business.

Secured business loans from ScotPac range from $10,000 to $500,000.  Our unsecured loans generally have a limit of $200,000. As a general guideline, we can provide funding of up to 100% of your average monthly sales. However, a strong asset base can assist in increasing the approval rate and loan amount.

Enhancing 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 35 years.

If you need external funding to take your business to the next level, speak to one of our Business Loan specialists today. We’ll help you find a solution that enables you to achieve your goals and fits with your existing funding arrangements. Alternatively, if you have questions about unsecured business loans, our lending specialists are here to help.

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.