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About Unsecured Business Loans
Unsecured business loans aim to provide the finance that businesses in the UK need without requiring any company assets to be put forward as security against the loan. This can make unsecured loans for business a relatively quick and simple way to raise finance.
The funds delivered by an unsecured business loan can be used for almost any business purpose, while not needing to provide any assets as collateral can make unsecured loans particularly appealing to newer and smaller businesses that perhaps have fewer assets to call on. You might find some of these loans are sometimes referred to as unsecured small business loans or unsecured start-up business loans.
That said, the appeal of unsecured business loans can extend to larger and more established companies. This type of loan is attractive to small and large businesses alike because of the speed at which it can be arranged and the fact that there is no need to put assets at risk.
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What are unsecured business loans?
Unsecured business loans provide a way for companies to access finance without needing to put up an asset as security against what they borrow. For this reason, an unsecured business loan might work for you if your business has little in the way of assets, or you would prefer not to place the assets your business does have at risk by using them as collateral.
How do unsecured business loans work?
With an unsecured business loan, the amount that is borrowed, plus interest, is repaid in instalments. These regular repayments will need to be made over a set period of time, which is agreed when the loan is taken out. Assuming all of the repayments are made as and when they should be, the loan should be fully paid off by the end of the loan term. The interest rate will also be set when the loan is taken out and if it’s a fixed rate, will remain the same throughout the term.
Importantly, an unsecured business loan can be arranged without having to offer assets, such as your business premises or equipment, as security against the loan. This means such assets are not at immediate risk if loan repayments go unpaid, as they would be with a secured business loan where collateral is required.
Instead, some lenders might ask a business owner to give a personal guarantee on an unsecured business loan. By giving a personal guarantee, the owner effectively promises that they will cover the repayment of the loan from their own personal finances if the business can’t.
Advantages of unsecured business loans
The main benefits of unsecured loans for business include the following:
- Accessibility: This type of loan is available if your business has few or no assets, or you don’t want to use them as collateral.
- Simplicity: It may be easier to arrange than a secured loan where assets are involved. Speed: It is usually faster to arrange because assets don’t need to be valued, and their absence can make it more straightforward from a legal perspective.
- Flexibility: The funds can be spent to help your business in almost any way it needs. Certainty: You know what your loan repayments will be and how long they will need to be made.
- Low upfront cost: There are often no fees for arranging an unsecured loan and if there are, they are typically small.
Disadvantages of unsecured business loans
Potential drawbacks of unsecured business loans can include:
- Higher interest rates: The absence of collateral as security usually means lenders often charge higher rates to compensate for the extra risk they are taking on.
- Lower loan amounts: Available loan amounts are likely to be smaller for similar reasons.
- Personal guarantees: If this is requested by a lender, a business owner’s personal financial situation could be affected if the business can’t repay what is owed.
- Poor credit: It could be harder to get an unsecured business loan if your business has bad or poor credit.
What is the difference between secured and unsecured business loans?
The main difference is that an asset needs to be put forward as security in order to get a secured business loan, but won’t be required for an unsecured business loan. This can make unsecured loans for business quicker and easier to arrange because they are less complicated to set up. Unsecured business loans will also usually have little to no upfront costs, because there are no assets to be valued or complex legal arrangements involved.
However, as lenders feel they are taking less risk with a secured loan, a comparable unsecured loan without an asset acting as security can usually be expected to have a higher interest rate to compensate. The amount that can be borrowed might also be smaller, and the length of time you have to repay your loan might be shorter through an unsecured business loan.
Can I get an unsecured business loan?
Unsecured business loans are available to various types of businesses in the UK, including sole traders, limited liability partnerships and limited companies. Eligibility criteria can differ between lenders, with each having its own minimum requirements in relation to how long a business has been operating and turnover. Most lenders ask that applicants be over 18 years of age, and that the business is registered in the UK, has a UK bank account, and has a good credit history.
Some lenders might also want a personal guarantee from the business owner, particularly for larger loan amounts. In this case, you may need to have a good personal credit history too.
To establish eligibility for an unsecured business loan, a lender might consider the size of the loan being requested and weigh it up against a business’s:
- turnover
- profit
- accounts
- trading history
- payment history
- projections and business plan
- funds in the bank
- customer base
Business Unsecured Loans FAQ
Some lenders will offer unsecured business loans without the need for a personal guarantee while others will insist on one. Requesting a larger loan amount might make some lenders more likely to ask for a guarantee than with a smaller loan.
Eligibility requirements can vary between lenders, but, as a minimum, most generally require:
applicants to be over 18 years old the business in question to be based in the UK proof that the repayments will be able to be met a business credit check to be passed
More specifically, a business will usually need to have been running for a certain amount of months and be able to demonstrate a minimum level turnover.
The paperwork you’ll need to provide is likely to vary depending on your lender, but generally most will need to see:
- proof of your identity
- proof of your address
- documents verifying your business
- business bank account statements or other supporting documents
A wide range of high street banks, challenger banks and alternative lenders all offer unsecured business loans.to.
The main advantage of an unsecured business loan is the ability for a business to raise finance without having to provide an asset as collateral. This can make unsecured loans for business a relatively quick and easy way for smaller businesses in particular to borrow.
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