Unsecured business loans are a way for your company to borrow without having to put down security. Because the loan is ‘unsecured’, you and your business won’t be at risk of losing any valuable assets such as land, property or equipment.
It makes unsecured business loans an option for firms that don’t have enough assets to present as collateral or would rather not provide security.
Since there are no assets to evaluate, the application process is easier and more straightforward than for secured business loans and the loans are quicker to process.
Unsecured business loans provide your company with up-front capital with no need to use assets as security. However, lenders will want to check your business credit score and personal creditworthiness to evaluate your level of risk as a borrower.
Lenders may also require you to sign a personal guarantee. This is a legal agreement for which an individual promises to repay the loan with their personal funds if the business fails to do so. As well as looking at the borrower’s credit score, lenders will often check the company’s financials to predict whether they’ll be able to keep up with payments.
To do this, they’ll need copies of both your personal and business bank statements, documents of any other outstanding business loans, and tax returns.
There are a few factors that lenders will take into consideration to determine whether your company is eligible for an unsecured business loan.
They check your business credit file for information such as your borrowing and debt repayment history, any current debts, and annual revenue. Based on this, lenders will have a better picture of whether you’ll be a reliable borrower. Lenders will also display a list of eligibility criteria on their website. Usually, they’ll want to know:
You can use unsecured business loans for virtually any company expense. In this sense, there are very few restrictions. They can be useful to extend your premises, give staff a pay rise, purchase new equipment and machinery, or simply give your business savings a boost.
That said, unsecured business loans are limited to funding legitimate business expenses only. In the same way that mortgages cannot be used to cover a holiday, business loans cannot support you with other unrelated costs.
Unsecured business loans tend to have a straightforward repayment structure – you agree to fixed monthly repayments at a pre-determined interest rate when you apply.
Payments will then be made over your agreed loan term until your loan has been fully paid back.
The loan term depends entirely on your lender, your business’ financial situation, and how much money you’ve borrowed.
Short-term one-to-five-year loans are most common, but some lenders can also provide you with a 10-year loan. Bear in mind that the longer you borrow the money for, the more you will have to pay in interest repayments.
The application for unsecured business loans is usually speedy and straightforward. This is because, unlike secured loans, lenders won’t need to spend time evaluating assets or valuables.
When applying for unsecured business loans, you can expect to receive full approval in the space of a few days. Sometimes, you might even receive funding on the same day you’ve submitted your loan application.
You may still be able to get an unsecured business loan if you or your business has bad credit, but it may be more difficult.
You might find there are fewer loan deals available and that you can’t borrow as much as you would like, or that the loans are more expensive because interest rates are higher.
If you’re having difficulty borrowing, you could look for a secured business loan instead. By agreeing to put down security, such as property or machinery, the lender might be more confident to approve your application. The risk is that should you default on loan repayments, the collateral could be seized.
The application process will vary from lender to lender. Business Finance Expert will help you navigate the process from start to finish. But generally speaking, here’s what to expect to be provided:
Works in a similar way to a personal overdraft, where you spend more money in your business account than you have available.
If you want to use a business overdraft, make sure you speak to the account provider first so that it is approved, and you’ll understand how much interest – if any – you’ll be charged.
Allows you to spend on credit with the understanding you’ll make the minimum payment or ideally clear the balance in full by the due date.
Can be a handy finance option to be flexible with your purchases, but there’s a risk of high-interest charges and penalty fees if you don’t pay what you owe in time.
Works in a similar way to a credit card as a line of credit that lets you borrow and spend as you need additional funds and then repay in time to keep interest charges low.
As with a credit card, a credit facility also allows you to borrow again up to a preset limit.
A way of receiving a cash advance set against future business sales. Often offered by non-traditional lenders who take a percentage of debit card and credit card sales to recoup this type of loan.
If approved, payments are taken out of your business account through a weekly or sometimes daily direct debit.