Small business owners often don’t feel comfortable putting assets up as collateral on their loans. If you take out an unsecured business loan, you won’t have to.
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 is unable to access the full range of loan amounts and rates. However, there are still highly competitive unsecured deals available.
Here’s how unsecured business loans work, when they’re suitable and how to find the best deal for your business’s needs.
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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 will 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 will have to sign the guarantee too.
In these cases, the individual is effectively acting as a guarantor. In a worst-case scenario, the individual could lose his or her assets if the company fails to repay the loan.
An individual offering a personal guarantee will need excellent credit in order for the loan to be approved. If they are a homeowner with a good amount of equity in their property, that will also help.
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’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 of time.
- 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 also 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 will use 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 will have its own minimum requirements you will need to meet before the lender will consider your application. Don’t waste time or energy on lenders that will instantly reject your application.
- How much can you borrow? Each lender will offer a specified range of loan amounts, typically between £1,000 and £100,000. The largest loan your company can take out will depend 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 will generally use 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 will be able to have the loan amount in your bank account within a few days, some are able to 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 will allow you to borrow £100,000 depending on your business’s perceived creditworthiness. However, they’re not always the best product for obtaining finance.
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Is my company eligible?
The lender will 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 will use this score in conjunction with other factors to consider your eligibility for a loan and the terms they offer to you.
Most lenders will display minimum eligibility criteria on their websites. This usually includes the following:
The eligibility criteria is usually stricter for unsecured loans than it 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.
Comparison of business loans
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 two 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 one working day.
Frequently asked questions