We recently sat down with Simon Isaacs, Founder and CEO, and Heath Fitzpatrick, COO of eBroker.

eBroker is an online business finance broker that uses AI and algorithm technology to match small business owners with various non-bank business lenders. 

In this Q&A, Simon and Heath share their thoughts on the unsecured loan market for small businesses in Australia and key issues to consider if a business is considering taking an unsecured loan.

What is the status of the unsecured loan market for small businesses in Australia?

Unsecured business lending is becoming an increasingly a popular choice among small businesses in Australia.  This is because there is an increasing number of lenders in the market that are prepared to lend on an unsecured basis, and there is an increasing use of technology to more adequately assess a borrower and that borrower’s risk profile.

What is an unsecured loan?

An unsecured loan means that the borrower doesn’t need to provide any assets to secure the loan.  It also means that even if the borrower has existing credit facilities in place, they can still be approved for a loan as no business assets or property is required as collateral.

However, in some cases calling a loan ‘unsecured’ is a bit of a misnomer.  While an unsecured loan may not be secured by physical assets owned by the borrower, a borrower will need to consider and be aware of the terms that apply to that loan and in particular any personal guarantees that may be given.  Such personal guarantees would make the loan secured by any personal assets owned by the guarantor.

What do lenders look for?

The common concerns of small businesses in obtaining an unsecured loan are that they are just starting out and don’t have a mature business; they have a bad credit history; or they don’t have enough assets to secure a loan.

While physical property or collateral may not be required, for unsecured loans, a borrower will be borrowing the funds against the future growth of their business. Lenders will consider:

• a borrower’s past transactions, credit/debit card sales, and account balance;
• whether a borrower has regular cash flow and account deposits to finance their business; and
• the amount of money a borrower has left after paying existing loans, suppliers, bills, etc. to determine if there is financial capacity to re-pay the loan.

How do repayments work?

Repayments are generally made at regular intervals. This is to reduce the risk on the lender side and also to monitor the borrower’s behaviour in making repayments. As to the amount that can be borrowed, this largely depends on the borrower’s monthly turnover. Usually, lenders will lend up to 80-90% of the borrower’s average monthly turnover to make sure there is some buffer to pay the principal and interest of the loan.

What are the advantages of an unsecured loan?

• Approvals for unsecured loans are generally fast.  A borrower can get qualified and be advanced funds within 2-3 business days of an application.
• No physical collateral or security is required.
• Credit score is generally not an issue. A borrower is generally qualified based on the strength of their business.
• Flexible payments. Repayments are calculated and made based on business profits. If a business is having a slow month, they can make adjustments on profitable business months.

What to look out for / what are the disadvantages?

• Due to convenience and higher risk ratings, an unsecured loan normally attracts a higher rate of interest.
• It is important that a borrower carefully considers and checks the terms of the loan contract.  Unsecured loans can have stringent default or missed payment conditions.  This may include the ability for the lender to take possession of any of the borrower’s business assets or the ability to enforce any personal guarantees.
• Given the higher rates of interest and repayments, these loans are normally only viable over shorter terms. 

Last Tip

As mentioned, it is important that a borrower checks the terms of its loan contract carefully.  If a lender requires personal guarantees, an unsecured loan may not necessarily be truly ‘unsecured’ and personal assets of the guarantors (usually directors of the borrower) could still be at risk. 

Thanks to Simon and Heath for their time and for sharing these thoughts and tips.

If you are a business and are considering your finance options, please get in touch with the team from eBroker - www.ebroker.com.au.

If you are a business owner and have any questions on the legal aspects of a loan contract or any security being provided, please get in touch with one of the Sierra Legal team - https://www.sierralegal.com.au/team.