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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.
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.
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.
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:
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.
Representative example: When you spend £1,200 at a purchase rate of 39.41% (variable) p.a., your representative rate is 39.9% APR (variable).
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.
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.
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