Unsecured business loans allow you to access business finance without putting up any assets as collateral.
These loans are riskier for the lender, so you might find your company cannot access the full range of loan amounts and rates. However, there are still highly competitive unsecured deals available.
What is an unsecured business loan?
Some business loans require the borrower to “secure” the loan by using assets (such as property, vehicles or equipment) as collateral. This essentially means the borrower stands to lose these assets if they fail to repay the loan by a specific time.
Not surprisingly, a lot of business owners either can’t or would rather not do this and opt instead for an unsecured business loan. It’s worth noting that if you fail to pay back an unsecured business loan, the lender could plausibly take your firm to court and seek to recoup its losses through the sale of assets.
What is a personal guarantee?
Lenders often require owners and/or executives of small to medium-sized businesses to sign a personal guarantee. This means an individual personally promises to pay back the loan if the firm fails to do so. In many cases, their spouse must sign the guarantee, too.
In these cases, the individual is effectively acting as a guarantor. In a worst-case scenario, the individual could lose their assets if the company fails to repay the loan.
An individual offering a personal guarantee needs excellent credit to get approved for the loan. It also helps if they are a homeowner with a good amount of equity in their property.
With a personal guarantee, the loan is still unsecured, since you are not using an asset as collateral, but for a lender, it’s now a less risky prospect.
If you sell your interest in a business, it’s important to release your involvement in a personal guarantee, or you’ll remain liable for any debt-chasing that may occur.
Should my firm opt for a secured or unsecured loan?
You may want to consider an unsecured business loan if some or all of the following apply to you:
- You have a small to medium-sized business with few or no valuable assets.
- Your company has an excellent credit rating.
- Your business is established and has growing monthly revenue.
- You need a quick cash injection for a one-off expense.
- You can afford to repay the loan monthly over 1 to 5 years.
A secured business loan may be a good option for you if some or all of the following apply to you:
- You’re looking to borrow a large amount of money, for example, over £1 million.
- Your firm has assets you can secure the loan against.
- You are in a position to make repayments over a long period.
- Your firm doesn’t have good credit.
What other factors do I need to consider?
Perhaps the main thing to take into account when considering a business loan is the financial risk: both that of the firm and its employees. At the same time, in business, it’s rarely safe to stand still and accessing finance could help your firm unlock the next chapter of its evolution.
You should only apply to borrow what you know your firm can comfortably afford to pay back. The lender uses your revenue and other factors to dictate how much it thinks you can afford to repay, but you should still make your own projections based on potential future cash-flow fluctuations. If you’ve done your sums and you’re confident the loan would be affordable, then there’s a good chance a lender will reach the same conclusion.
Here are some of the most important things to consider when considering unsecured business loans:
- Is your firm eligible? Each lender has its own minimum requirements you need to meet before the lender considers your application. Don’t waste time or energy on lenders that will instantly reject your application.
- How much can you borrow? Each lender offers a specified range of loan amounts, typically between £1,000 and £100,000. The largest loan your company can take out depends on factors like its turnover and credit score. Many lenders now offer a quick online eligibility checker, which can give you a good idea of whether it would lend to you, the rate you’d be offered and the maximum amount you could borrow. This service generally uses a “soft” credit search, meaning it won’t affect your credit score (but you should always check that this is the case).
- How much will it cost? Consider both the overall cost of the loan and the cost of each monthly instalment. You’ll want to aim to keep the overall cost as low as possible while ensuring you can afford the repayment schedule. While it might sound obvious, the overall cost is an excellent benchmark for comparison, as it takes into account both interest and any fees.
- Does the loan offer flexibility? Business loans tend to offer more flexibility than personal loans. Some lenders may allow you to vary the size of your repayments, helping you to cope with fluctuating cash flows, and some may even offer a repayment holiday facility, allowing you to skip a repayment altogether (the loan will continue to accrue interest). It’s also worth checking how easy it is to pay some or all of the loan ahead of time and, crucially, how much doing so will actually save you.
- What are the fees and charges? Are there upfront fees you need to pay to establish the loan? What about ongoing fees? These, along with interest charges, can have a huge impact on the cost and affordability of the loan, so make sure to compare and find the most competitive offering from lenders.
- How much revenue will the capital unlock? Take some time to make sure that the loan makes sense financially. It’s one thing to be able to afford it, but when do you expect to see a return on the investment and can you quantify it?
- Who is the lender? The lender you borrow from should also form part of your decision. Is it regulated by the Financial Conduct Authority (FCA)? What do online reviews say about the lender? How easy is it to contact the company?
- What’s the turnaround time? Business loans can take a little longer to process. If you’re in a rush, check the turnaround time of the loans that you’re considering. Most lenders can have the loan amount in your bank account within a few days, and some can transfer it the same day.
What are the alternatives to unsecured business loans?
Unsecured business loans are a handy solution if you’re looking to borrow significant sums of money with short notice. Some lenders allow you to borrow £100,000 depending on your business’s perceived creditworthiness. However, they’re not always the best product for obtaining finance.
- If you’re looking for a more affordable rate on your loan and you have assets you can use as collateral, consider a secured business loan instead.
- If you’d prefer to borrow a small amount of money on a regular basis, a business credit card could prove more suitable.
- If you’re after flexible access to funds to use as working capital or to cover emergency expenses, you could be better suited to a business line of credit. You may also be able to add an overdraft, which works in a similar way, onto your business current account (although it’s important to check the charges for using this, since they can be extortionate).
- Invoice factoring and invoice financing allow you to unlock value in unpaid invoices, although this can prove expensive as a long-term solution.
Is my company eligible?
The lender use the information on your business credit file to determine your creditworthiness. The data on this file includes your borrowing history, current debt, revenue and debt repayment history. Credit reference agencies consider this information when creating your business credit score.
Lenders use this score in conjunction with other factors to consider your eligibility for a loan and the terms they offer to you.
Most lenders display minimum eligibility criteria on their websites. This usually includes the following:
- Minimum age of applicant (typically 18 years old)
- Role of applicant within the business (typically owner or director)
- Minimum amount of time trading (normally 6 or 12 months)
- Minimum average monthly sales
The eligibility criteria is usually stricter for unsecured loans than they would be for a secured loan. You can check your business credit score by contacting any credit reference agency, such as Experian, Equifax or TransUnion.
How to apply
You can usually apply for an unsecured business loan via the lender’s website.
The application process rarely takes longer than a few minutes, provided you have all the necessary information at hand.
You’ll need to gather all the basic information used to identify yourself and your business. You’ll also have to provide financial details, including up to a year’s worth of bank statements and VAT returns. You may also have to explain what you’re planning to use the loan for.
It’s common for lenders to offer an instant decision on the success of your application, although some take up to 2 working days to inform you. As you’d expect, larger sums and more borderline cases require more scrutiny and can take longer to be approved.
Once your loan is approved, you can expect to have access to the funds within 1 working day.
The bottom line
If you’re a small or medium-sized business looking to borrow some cash, then an unsecured loan could be a good option, granted you meet the eligbility criteria. Unsecured loans usually come with shorter repayment terms but can be a sensible method of borrowing money without feeling like you’re exposing your assets. But it’s best to do some research before you make any financial committments.
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