Unsecured Business Loans Explained

Unsecured business loans provide access to funds without requiring collateral or asset security. Unlike secured loans, which are backed by tangible assets, unsecured loans are granted based on the borrower’s creditworthiness, business performance, and financial health.

When applying for an unsecured business loan, lenders assess factors such as your credit score, revenue history, profitability, and cash flow. The loan amount and interest rates are determined based on these evaluations. Once approved, the funds can be used for various business purposes, such as inventory purchase, equipment upgrades, marketing campaigns, or working capital. 

Repayment terms for unsecured business loans typically involve regular instalments over a predetermined period, often ranging from months to several years. It’s essential to review the loan terms and ensure that the repayment schedule aligns with your business’s cash flow capabilities.

The phrase ‘no asset security’ refers to the absence of collateral or tangible assets required to secure a business loan. When Prospa provides a small business with funding we take a personal guarantee from directors, shareholders or persons actively engaged in the management of the business, such as the business owner.  

There are two circumstances under which we may also take security in the form of a charge over assets. That is, if the client’s total combined exposure to Prospa funding is (or becomes) greater than $150,000, and/or if a client defaults on their contractual obligations. 

The charge over assets allows us to register the security interest on the Personal Property Securities Register (PPSR), or we may register a caveat. If the customer’s combined exposure to our products is over $150,000 we will usually only register on the PPSR (unless the customer later goes into default). If a customer defaults under their loan, we may register on the PPSR and/or register a caveat. 

Interest rates on unsecured business loans can vary based on several factors, including your creditworthiness, the lender’s assessment, the loan amount, and the repayment term. As there is no collateral to mitigate the lender’s risk, interest rates on unsecured loans are typically higher than those on secured loans. 

It’s important to research and compare interest rates from different lenders to secure the most favourable terms for your business. Some lenders may offer fixed interest rates, ensuring consistent monthly payments, while others may offer variable rates that fluctuate with market conditions. Consider your business’s financial situation, risk tolerance, and repayment preferences when selecting the loan option with the most suitable interest rate structure. 

When applying for a traditional secured business loan, lenders typically require collateral to secure the loan amount.

Acceptable forms of collateral can include: 

• Real Estate: Property such as land, buildings, or commercial spaces can be used as collateral. 
• Vehicles and Equipment: Lenders may accept valuable machinery, vehicles, or equipment as collateral. 
• Inventory: Certain lenders may consider inventory as collateral, especially in industries where inventory value is high. 
• Accounts Receivable: Unpaid customer invoices or accounts receivable can be used as collateral in some cases. 
• Cash and Savings: In certain instances, lenders may allow cash deposits or savings accounts to secure the loan. 

At Prospa, if a customer borrows more than $150K, we require upfront asset security in the form of a charge over the applying business entity (or entities) which will be registered on the Personal Property Securities Registry (PPSR).  

It’s important to note that the specific collateral requirements can vary between lenders. Always consult with your chosen lender to determine their acceptable forms of collateral. 

While various assets can be used as collateral, certain types of collateral are generally not accepted by lenders:

• Personal Assets: Typically, lenders require business-related collateral rather than personal assets, such as a personal residence or personal savings. 
• Intangible Assets: Assets such as intellectual property, trademarks, patents, or copyrights are generally not accepted as collateral. 
• Future Revenue: Lenders usually do not consider projected future revenue as collateral since it is uncertain and not immediately accessible. 
• Uninsurable Assets: Assets that cannot be insured or have uncertain value are less likely to be accepted as collateral. 

It’s crucial to review the specific collateral requirements of lenders before applying for a business loan to ensure your assets align with their criteria.