How Small Business Lenders Quote Costs
An unsecured loan is simply a loan that does not require the business owner to provide any collateral or security to back the loan.
Small business lenders have now stepped into the gap, and they provide Unsecured Loans to small business owners.
It is not uncommon to apply, and have funds in your bank account within 48 hours.
Unsecured loans have opened the doors for smaller businesses to qualify for business funding where they previously would have to turn to a very costly personal loan.
Annual Percentage Rate (APR) - What's the deal?
An unsecured loan is characterised by two features:
- A fixed repayment term
- Fixed repayment amounts
Unsecured loans are generally short term. This means repayment is generally no longer than 2 years.
A typical repayment term can range from 3 months through to about 24 months. It depends on your preferences, and the lender.
Repayment of an unsecured loan is very simple. You will generally pay a fixed amount over a set period (every week, second-week or month).
The repayment amount is generally made up of two components:
- Capital repayment: The repayment of the amount loaned
- Interest/fee repayment: The repayment of the cost/fee that the lender has charged for the loaned amount
The portion of each component which you pay depends on the lender.
As an example: Some lenders like to recoup a large portion of their Interest/fee's in the early stages of the loan.
Let's say you loaned R100 000 for 6 months, at an interest rate
How Much Does an Unsecured Loan Cost?
An Unsecured Loan interest rate can range from 1% per month through to 6% per month.
This equates to an annual percentage rate (APR) ranging from 12% to 72%.
A typical unsecured loan cost example:
Factors that affect the cost of an unsecured loan:
The cost of the loan depends on a number of factors. These include:
- Monthly turnover: How much you make every month
- Monthly turnover variability: How much it changes from month to month
- Time in business: How long you have been trading for.
- Business credit score: As small business credit scores become more prevalent, lenders are taking into account the reputation of your business.
- Director's credit score: Most lenders will consider the credit score, and any adverse judgements of the directors of the business. This does not mean if a director has a bad score they will not get any funding.
- Reason for borrowing: Lenders do consider what the reason for your loan application is.
- Lender: Some lenders are primarily focused on speed of funding. This means they will take more risk, and accept less documentation in the application so that it gets processed fast. However, this normally means the loan is slightly more expensive.
In general, a good rule of thumb when it comes to pricing: The more risk the lender takes on, the more expensive the loan will be. That is why an unsecured loan is more expensive than a secured loan.
But it is also why an unsecured loan can be disbursed in less than 24 hours, and a secured loan generally takes weeks to process.
What Can You Use an Unsecured Loan For?
Anything you'd like.
It's very seldom that a lender stipulates your use of funds.
One thing to bare in mind though, is that it your use of funds is one of the factors that a lender might consider in your loan application.
As an example, if you are using an unsecured loan to buy another business, the lender might consider the revenue generation and cash flow of that business as part of your repayment ability.
In that case, the lender is going to factor in your use of funds as a consideration when deciding how much to loan, and how much it is going to cost.
Common Unsecured Loan Uses
Here is a list of some of the common reasons an SME business may want to use an unsecured loan:
- Working capital: For general cash flow in business operations.
- Growth capital: Cash to grow your business through new ventures, or increased investment spend.
- Buying inventory: Buying more stock so that you can sell more, and earn more revenue.
- Tax/VAT Payments: If you are hit with a big tax bill that you may not be able to afford upfront you can finance it using an unsecured loan.
- Upgrading business premises: Use the loan to upgrade your facilities or property.
- Importing or exporting goods: An unsecured loan can be a good bridge for the period over which you have a cash flow shortage.
As a good rule, you should only be taking out an unsecured loan if the potential return on investment is higher than the cost of the loan.
What is an Unsecured Term Loan vs an Unsecured Loan?
An Unsecured Term Loan and an Unsecured Loan are one and the same.
Some lenders choose to refer to an unsecured loan as an unsecured "term" loan because the generally the repayments are over a fixed period, or "term".
There are no significant differences you would need to worry about between the two.
How Does an Unsecured Loan Application Process Work?
We've designed our Unsecured Loan application process to be as fast as and easy as possible.
We only collect the most important information, and keep you informed on what you need to provide to maximise your application profile and get your best offers.
Step 1: Apply through FundingHub
One application form will mean you find Unsecured Loan offers from over 20 different lenders.
It's fast, and free, and fully online.
Step 2: Add Information and Documents
FundingHub allows you to pause an application, and finish at a later stage. We guide you through the different document requirements, and which lenders need what information.
Step 3: View Loan Offers
We will present you with a list of all your loan offers. This takes seconds to fetch, and the list will be continually updated as you add more information to your profile.
Step 4: Choose an Offer
All the specifics around, pricing, fee's, speed of funds and the different lenders is laid out for you. If you have questions, we've got an independent analyst who can help you choose the right offer.
Step 5: Finalise Application with Lender
One application form will mean you find Unsecured Loan offers from over 20 different lenders. It's fast, and free, and fully online. If you have questions, we've got an independent analyst who can help you choose the right offer.