An unsecured business loan is where instead of lending against an asset, a lender will grant а loan based on the financial health of a business and solid risk analysis that looks into a broad range of financial data.
Unsecured loans are available from a variety of different lenders, including traditional and alternative providers. Due to the nature of the loan, they could be set up much faster than medium or long-term loans. However, this might vary depending on the lender or complexity of the case.
How do unsecured business loans work?
A business must first submit an application to a lender, which will include information on their current business and finances. The lender will then evaluate the application to check the financial stability of the business and the risk of lending. If approved, the business will get access to the funds, nowadays often via a personalised online dashboard. The business will pay back the amount given over a set period, in addition to the lender’s charges and interest.
Unsecured loans are an important part of the financing mix and are used by businesses to grow or pursue opportunities. With quick application processes and fast turnarounds, many lenders offer attractive solutions. Reasons you might seek an unsecured loan include:
Managing cash flow
Purchasing inventory or equipment
Remodeling and renovation
How can you use an unsecured business loan?
Many businesses seek unsecured loans to ensure that they can focus on day-to-day business operations instead of spending too much time working on finance. Reasons you might seek an unsecured loan include:
Manage cash flow
Renovate your location
Invest in staff
The Pros and Cons of Unsecured Business Loans
Pros of Unsecured Business Loans
No collateral This is the largest advantage, as many businesses have already provided collateral for a secured loan. Unsecured loans without collateral therefore often work well as a top-up in a business’ overall finance mix.
Straight-forward application process Unsecured loans do not need assets to be itemised and evaluated and therefore the application is more straight-forward and can to a larger extent be done online
Speed As asset valuations are not necessary, the application, as well as the loan approval process, is often considerably faster than the process for an asset-based loan
Less up-front cost As the process of applying for an unsecured loan is straightforward and simple, there tends to be little to no upfront costs for an application.
Cons of Unsecured Business Loans
Higher interest rates As the lender is taking over risk from the business, unsecured business loans typically have higher interest rates.
Not suitable for starters As an unsecured loan is not based on assets, your company credit needs to be strong, and you need to prove that the business is financially stable and profitable. This means well-established businesses with a longer cashflow history are more likely to successfully apply for an unsecured loan than start-up companies with a limited track-record.
Unsecured loans are typically used by businesses that have an existing loan for which personal collateral has already been provided. It can also be favoured by directors who do not want to risk their own personal assets, and by businesses that need funds for short tenor. Read Martin Aerospace’s story, a manufacturer of parts for Boeing and Airbus engines, and how an unsecured loan helped their business.
What types of business loans are available?
There are more business loan types available than ever thanks to the many niche lenders that have entered the market in recent years. The main types of business loans are secured and unsecured. In addition to loans, businesses can also explore finance options such as invoice finance, merchant funding, and flexible credit lines.
What documentation is needed for an unsecured business loan?
In order to apply for an unsecured loan, you need to provide the following documents to a lender:
Personal information of the applicant/director
Business information such as company number, name and registered or trading address
Can I get a business loan without a personal guarantee?
Yes, some lenders can provide unsecured business loans that do not need personal guarantees. Upon being reviewed by a lender a business may be deemed to be of sufficient strength and a personal guarantee may not be required. Adding a personal guarantee to the loan may increase the amount a business is able to borrow, improve the interest rates or make up for a business requirement that is not quite met.
Why do lenders ask for a personal guarantee?
Personal guarantees give lenders additional assurance that they will recoup some of the capital if a loan defaults. A personal guarantee agreement is where the person, often the business’ director or several directors, taking the loan will be held personally liable if the necessary loan repayments can’t be made. As a guarantor, personal assets could be taken if the business fails or is otherwise unable to repay the loan.
Want to know more?
Speak to our client services team on 0203 308 9188 or have a look at our brochure.