Unsecured Business Loans

What are unsecured business loans?

An unsecured business loan is a way to help pay for your business's needs, such as extra computer equipment, office refurbishment, marketing campaigns and to make the most of opportunities to increase revenue.

An unsecured business loan isn’t secured on any business assets such as machinery, property or equipment.

Because no assets are secured against an unsecured loan, most lenders require the business owner to personally guarantee the loan, meaning it’s helpful for you to have a good credit rating, and you’ll be responsible for paying back the loan if your business is unable to.

Unsecured business finance can be beneficial for companies with little or no assets.

What is the difference between an unsecured and secured business loan?

A secured business loan means you would need to use your business assets as a way of guaranteeing you can repay what you owe. If your business fails to repay the balance of your loan, your lender could sell the business assets you used to secure the loan to repay what your business owes.

Because there is less risk for the lender, unsecured business loans tend to charge lower rates of interest, and you’re usually able to borrow more too.

An unsecured business loan usually requires the business owner to guarantee the loan in case the business is unable to repay the loan.

Because there is a more significant risk to the lender, unsecured business loans tend to come with higher interest rates than secured business loans. But your interest rate will depend on the lender, your company’s credit history and your business’ cash flow forecast.

How do unsecured business loans work?

When a lender is deciding whether or not to approve an unsecured business loan, they’ll look at your business’s incomings and outgoings, review an overview of your cash flow, and they’ll want to understand what the loan will be used for.

Like any other type of loan, you’ll receive the money once approved, and your business will need to pay it back in monthly instalments, plus interest by a date you agree with the provider.

What are the alternatives to unsecured business loans?

There are several alternative business funding options. These include;

• Invoice factoringThis method enables your business to sell your unpaid invoices to a third-party company that buys the invoices for a percentage of their value. They then become responsible for chasing payment, but you must sacrifice a portion of what you’re owed using this method.
• Business overdraftAn overdraft can provide your business with additional funding to deal with seasonal trends and short-term cash flow, but tend to be reserved for emergencies because the interest rates are typically much higher.
• Lines of creditThis allows you to borrow money up to an agreed credit limit. Interest is only paid on the balance owed, so it can help solve cashflow challenges, although it’s worth noting that interest rates can be high.
• Asset financingBusiness asset financing allows you to release cash from your business assets, such as property or machinery, which can be used as security to finance goods to generate additional income or grow your business.
• Merchant cash advanceThis form of cash advance is repaid automatically when you take a card payment from a customer. This method tends to be a last resort for businesses with bad credit because interest rates can be high, and repayment is dependent on trade.
• Government Start Up loansThese loans are designed for new businesses that may struggle to be approved for a traditional business loan. Government Start Up loans allow you to borrow between £500 and £25,000 to start or grow a business. There are strict eligibility criteria; however, interest rates are low, and free business mentoring is included.
• Company credit cardsSome businesses use credit cards interest-free for up to 56 days. After that time, you’d usually need to start paying interest on any balance, but if you only need to borrow for a short period of time, they can be a helpful way to access funds.

How much do unsecured business loans cost?

How much an unsecured business loan will cost depends on how much you wish to borrow and the interest rate the provider will charge you.

You may also need to pay certain fees on top such as;

• Arrangement fees
• Broker fees
• Processing fees
• Completion fees

One of the simplest ways to determine how much a business loan will cost is by using an online unsecured business loan calculator.

You’ll need to input how much you wish to borrow, any fees you’ll need to pay, plus the interest rate and the calculator will tell you the total cost of a loan, based on it’s advertised rates.

These calculators are free to use and excellent for comparing loans from different providers.

What happens if I can't pay my unsecured business loan?

If your business cannot repay your business loan and you’ve personally guaranteed it, you’ll take on the responsibility of repaying it. In most circumstances, you can take steps to prevent legal action and bankruptcy.

The first thing you should do is speak to your lender about a payment plan. They may be able to offer you lower repayments over an extended period or even temporarily pause your monthly repayments to help you get back on your feet.

Also, try speaking to your accountant - they may be able to find ways to free up cash from other areas of your business to repay your loan.

Ultimately your lender wants you to repay your loan and doesn’t want to bankrupt you, so it’s always best to speak to them as soon as you find yourself struggling financially. The longer you put it off, the worse your situation will become.

Can I get an unsecured business loan with bad credit?

Yes, it is possible to be approved for an unsecured business loan, even if you or your business has a bad credit history. However, it’s likely to be more challenging to find a traditional lender willing to approve you for one, because they’ll perceive you as too risky to lend to.

Some alternative lenders design loans for businesses with bad credit that you can usually apply for online. It's highly likely that any unsecured business loan you’re approved for will charge higher interest rates, and the amount they’re willing to lend you will typically be smaller.

Although bad credit business loans can be found from a range of specialist loan companies, bad credit can be improved by paying off old debts and managing new ones responsibly.

Resist the temptation to apply for numerous loans because this will further harm your business’s credit rating, suggesting you’re desperate for cash. Even if you’re application is refused, a record of it will be left on your credit report, leading to further refusal or exceptionally higher interest rates.

What are the pros and cons of unsecured business loans?

Pros

• Lower risk to your businessYou’ll gain access to money to invest in your business without the risk of securing assets against the loan.
• Access to funds quicklyCan be quick to access money due to not needing the documentation against securing the loan with assets.
• Lower upfront costsBecause there are no legal and valuation costs, the upfront costs of an unsecured business loan can be lower.
• Greater choiceBecause the loan process is more straightforward when you’re not securing the loan with assets, there are more providers to choose from.

Cons

• Loan limit may be smallDue to the increased risk to lenders, many will only loan smaller amounts.
• High interest ratesUnsecured loans tend to have higher interest rates because of the increased risk to lenders.
• Guarantors typically need good credit scoresMost unsecured business loan providers require a decent credit score.
• Stricter criteriaIf your credit score, business plan, financial statements and cash flow aren’t in order, you’re unlikely to qualify for an unsecured business loan - eligibility criteria tend to be stricter for unsecured business loans.