Unsecured business loans give you the opportunity to quickly access finance, without the need for collateral
If you’re a UK business who lacks assets, or if you don’t want to use your assets as security, an unsecured business loan could provide a quick, simple, and low-cost way to borrow.
An unsecured business loan allows you to borrow without having to secure the loan against any business assets, such as property, equipment or machinery. These loans are a relatively simple – and fast – way to get an affordable cash injection if your business lacks assets or if you don’t want to secure what assets you have against your loan.
There are many UK lenders who can offer your small business funds for working capital, growth or expansion and if you like the idea of fixed, monthly repayments within an agreed time frame, a business loan (whether unsecured or secured), could be your best option.
An unsecured business loan provides your small business with upfront capital without requiring security. There are many different unsecured business loan options out there, each with varying terms to suit different kinds of businesses. You can usually access funding quickly, often on the same day.
You repay your loan in monthly or quarterly instalments over a fixed time frame, and you can choose to take out a short-term loan or medium/long-term loan (i.e. ‘term’ loan), depending on your business needs.
You might have the option to pay off your loan early (in some cases without a fee).
A secured business loan uses your assets as security. Usually these assets are tangible items such as commercial property, machinery or vehicles, but there are other types of secured lending which use intangible assets. For example, with invoice finance, you’d use your accounts receivable as security.
If you can’t repay your secured loan, the lender can sell the assets to recoup the cost of the loan, which reduces their risk.
With an unsecured loan, on the other hand, the lender has no security and therefore cares much more about your business profile, for example, your business turnover, trading history and credit score. The lender may also look at your personal credit history and personal assets, and might ask for a personal guarantee.
Unsecured lending is usually more expensive (i.e. interest rates are higher) than secured lending because the lender is taking on more risk. Lenders might also offer shorter terms and smaller amounts.
Unsecured business loans are usually simpler and quicker to arrange, compared to secured loans, because there’s no need for the lender to inspect or value any assets. These valuations involve legal costs, which you’ll have to pay upfront. By contrast, an unsecured loan doesn’t usually involve any additional upfront costs.
The eligibility criteria for an unsecured business loan are very simple. Your business needs to have been registered within the UK for at least six months, and have some sort of turnover (£5,000 per month minimum should be enough). Applicants must be over 18 years of age. More specifically the lender is likely to look at the following:
• turnover and profit (vs. loan amount)
• bank statements
• filed accounts
• trading history
• payment history (e.g. late payments, county court judgments)
• directors’ histories (lenders may ask for a personal guarantee)
• forecasts and business plans
• your clients/customers.
Lenders sometimes specify the loan amount as a multiple of your businesses monthly turnover. They’ll also look at your trading history and credit score.
If you’re after a large unsecured business loan you’ll need to have a strong cash flow position, a long trading history and a balance sheet that shows you can easily afford repayments. If you have a poor credit history you’ll also need to demonstrate a sustained period of growth.
If you’re an early-stage or small business, you’re unlikely to be offered a large unsecured loan, even with a personal guarantee. You might want to consider a secured loan or some other type of lending.
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You can access finance quickly – often within a few hours of applying. This makes it a much faster option than a secured loan, for which the lender would need time to inspect and value assets.
The main downside of not offering assets as security is that lenders take on more risk than they would with a secured loan, which means they’ll most likely lend smaller amounts, over shorter time periods, and at higher interest rates. That said, if your business has a solid trading history and a good credit rating, you might be offered more favourable terms.
Just as with any loan, the interest rate on a secured loan will depend on the product and the risk to the lender (i.e. your business circumstances). If your business has a solid trading history and a good credit rating you’ll likely be offered better interest rates.
You’ll generally pay more interest with unsecured loans, compared to secured loans, because they’re not backed up by any assets, which means there’s a higher risk for the lender.
You might be asked to provide a director’s personal guarantee to secure the loan (regardless of your credit score). Bear in mind that if you’re the director offering a personal guarantee (i.e. offering assets such as your home as security) and your business then fails to make repayments, you become personally liable for paying off the debt. You should seek professional advice before you consider signing a personal guarantee.
Yes, it is possible to get an unsecured business loan with bad credit.
As you’d expect, if you have a poor credit history it’s usually more difficult to get any type of loan. But if you’ve tried and failed to get a loan from a high street bank, you might have more success with an alternative lender.
Bear in mind that you’re more likely to be limited to either smaller loans, shorter terms or higher interest rates – the rate will depend on the product and the risk to the lender.
It’s worth checking to see if you can improve your credit score before you apply for a loan, so you can maximise your eligibility.
If bad credit is the reason you can’t get a business loan, you could consider other types of unsecured lending, including merchant cash advances, revolving credit facilities, overdrafts and credit cards. You might also consider invoice finance, which uses your accounts receivable (i.e. intangible assets) as security.
Yes, you can get smaller unsecured business loans for start-ups and small businesses. This means that even if you’ve not been trading long, you might still be able to get a business loan without having to secure it against any of your personal assets, such as your home. That said, if you’re after a large unsecured business loan, your business will need to have a strong cash flow position, a long trading history, provable growth, and a balance sheet that shows you can easily afford repayments. So you’re unlikely to meet these criteria if you’re an early-stage or small business.
Missing a loan payment or defaulting on a loan (defined as failing to pay back a loan within an agreed time-frame) can cause serious problems for your business.
Before you agree to a loan, you should check what the terms and conditions are for non-payment. If you miss a payment, you will most likely incur a fine, based on a percentage of your monthly instalments. You might also have to pay the administrative costs that your lender incurs in notifying you.
Your contract will specify what constitutes defaulting on your loan – it can be after several – or just one – missed monthly payments.
While you won’t lose any assets by defaulting on an unsecured loan (unless you’ve given a personal guarantee), your credit score will certainly take a hit. This means you’ll find it more difficult to access finance in the future, including other business loans. It can also impact your future business dealings, since many companies carry out credit checks on companies they’re considering working with.
A poor credit score also means less favourable terms (for example, higher interest rates) on any loans or other types of finance you might apply for in the future, because you pose an increased risk to the lender. While there are ways you can improve your business’s credit rating, negative information can stay on your company credit file for years.
If you would like to discuss unsecured business loans, or are unsure about the best type of finance for your business’ situation, register with Swoop to speak to a financial expert about your options.
Arabella is a former BBC business journalist who began her career as a policy analyst at the Bank of England and Financial Conduct Authority, and more recently worked in the communications and policy team at the British Business Bank.
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