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Financial Requirements of a Business to Get an Unsecured Loan

When applying for an unsecured business loan, your company’s financial health will influence the lender’s loan approval decision. But that’s just one of the many factors.

With unsecured business loans, you borrow money without any collateral. This feature is the key difference compared to secured loans and it’s also why the approval depends on the cash flow and creditworthiness of a business. 

Usually, this type of loan is short-term, ranging from three months to three years. However, no one can make a claim on your business’s assets if you can’t make payments. That’s why they come with higher interest rates and shorter loan terms. 

Whether you want to level up your cash flow, purchase new equipment, or overcome a cash crunch, keep in mind that there are specific financial requirements for unsecured loan approval. 

Read on to learn about the unsecured business loan eligibility criteria used by most lenders when assessing your application. 

Minimum Revenue

Most lenders will take your minimum revenue into account when assessing your application. The minimum income required for getting a loan, however, will differ for various loan types. Also, this requirement varies depending on how much money you plan on borrowing. 

You may be required to gross at least $200,000 a year to get a line of credit. On the other hand, equipment loans are different as they are secured by the value of the equipment that’s to be purchased. 

Time in Industry

Depending on the type of loan, your company’s years in operation could have a significant impact on your application. Revolving credit lines are usually reserved for businesses that are over a year old. Meanwhile, invoice factoring is typically for companies that have been operating for at least six months. 

Ultimately, lenders need to be confident that you’ll be in business long enough to make repayments until the loan is fully repaid. For that reason, they will mostly be looking at companies with some trading history.  

Personal Credit Score

One of the most crucial requirements for unsecured loan approval is having an excellent personal credit score. 

Again, lenders will use this score to ascertain your creditworthiness. That is why you may be asked to include your personal credit history in addition to your company’s. 

Company Credit

Building on the last point, your company must also be creditworthy. 

Lenders will take into account your company’s existing loans to see if you can afford more debt. That means they will access the company’s credit files and scores, making it harder to get a new loan if your repayment history isn’t spotless. 

Tax Debt

If your business owes money to the Australian Taxation Office (ATO), it can negatively affect your unsecured loan application. So, you may look into getting a loan to pay off your tax debt first and increase your chances of approval. 

Cash Flow

As mentioned, most unsecured loans are in the short term. And that means you will need healthy cash flow to make repayments. 

A general rule of thumb is to borrow no more than 80% of your monthly revenues (on average). So if your monthly revenue averages $40,000, you could borrow 0.8*$40,000 = $32,000. Anything above that sum would be unsustainable for your business. 

But if you need to get more than 80%, it’s recommended to consider the purpose of the loan. If you plan on using the money to purchase equipment, for example, it may be better to go with equipment finance. 

Customer Diversity

Among other things, your revenue is highly dependent on your customers. That’s why if most of your turnover comes from a single customer, this can be a red flag for lenders. That’s because losing that customer may leave your business without revenue. 

But if you have a small army of customers, you may want to alert the lender to that fact. 

Profit Margins

Having healthy profit margins are often an essential factor for lenders when it comes to financial requirements for an unsecured loan. Lenders will want to make sure that your profit margins are healthy, as that should make repayments more comfortable for your company. 

Important Documentation 

To assess all of the requirements mentioned above, lenders will most often require the following documents:

  • Financial statements of your business
  • Tax returns and statements
  • Bank account statements

Some lenders may also ask for a “director’s guarantee”. This means you, as the director, will personally guarantee to pay back the loan in the event that your company defaults. 

Six Reasons Why Applications for Unsecured Loans Get Declined

The strict eligibility criteria for unsecured loans is understandable. These loans are high-risk for lenders after all, which means they need to be confident that the applicants will be able to repay. 

Here are six of the most common reasons why lenders decline an unsecured loan application:

  • It’s a new business 
  • The business is part of a declining industry 
  • There’s an outstanding debt
  • It’s a seasonal business 
  • Inconsistent revenue
  • Low credit score

Apply for an Unsecured Business Loan Today

Small businesses are relying more and more on unsecured business loans as a way to raise capital. It’s mostly because standard lending options come with much stricter rules and conditions and require long-term trading history. 

There are numerous reasons for applying for an unsecured business loan, such as:

  • Property purchase
  • Business renovation
  • Equipment purchase
  • Marketing 
  • Inventory purchase
  • Employee hiring
  • Working capital increase
  • Tax payment

Needless to say, you can kick-start new growth opportunities for your business with an unsecured loan. Just make sure you meet the financial requirements highlighted in this article.

If you’d like to apply for this type of loan, Unsecured Finance Australia can help. 

We offer unsecured business loans starting from $5,000 up to $300,000, which could be just what you need to give your business that much-needed push. 

We ask for minimal documentation and offer 24-hour approval. 

You can find out more about our unsecured business loans here.

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